What Is Revenue?
Revenue is the money a business earns through its normal activities, typically meaning sales.
Revenue is calculated before deducting taxes, interest, expenses, or the cost of goods sold.
Revenue is a useful number because it reflects a company’s overall ability to generate profit.
It is also the starting point for many other metrics, such as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
Define Revenue in Simple Terms
In the simplest terms, revenue is the cash a business generates through sales.
It is a before expenses figure, meaning that a company’s revenue is always greater than their actual profit.
Overall, revenue is a measure of the amount of cash a business is capable of generating.
This can be useful when comparing how efficiently two or more companies are utilizing their resources.
For example, consider two competing companies: Company A has $10,000 in assets and generates $500,000 in revenue.
Company B has $5,000 in assets and generates $400,000 in revenue.
At first glance, Company A seems to be the better performing company; however, Company A only generated 50 times their assets.
Impressive, but Company B generated 80 times their assets.
That means that Company B is utilizing their assets more efficiently than Company A and may have greater growth potential; an important detail for investors.
Sources of Revenue
Revenue generally refers to the sum of income a business produces; however, there are also specific subcategories of revenues. Some examples are:
- Sales/Service Revenue: This is the primary type of revenue made by businesses. It is revenue produced from selling a product or delivering a service.
- Interest Revenue: Many companies also earn income from interest. This can be from loans it has given out or from bonds that it owns.
- Rent Revenue: If a company rents properties, then revenue from rent will compose a sizable chunk of its income.
- Contra Revenue: Contra revenue is money earned back from returns or discounts. For example, returning defective machinery produces contra income, as would buying manufacturing materials at a discount.
How to Find Revenue
et revenue is often located at the bottom of a company’s income statement. As such, it is sometimes referred to as the “bottom line” as is where the turn of phrase comes from.
Without access to an income statement, you can calculate average revenue by multiplying the average price of a good by the total number of sales.
The revenue a company earns through doing business is often referred to as operating revenue.
It includes revenue from sales and services, as well as interest, rent, and any other income that is produced through regular business activity.
Some businesses also generate non-operating revenue, which is any revenue from sources outside of regular business activities.
Income from investments, asset appreciation, loans, interest income, and lawsuit proceeds are all examples of non-operating income.
Formula For Revenue
The formula for calculating revenue is simple.
Simply multiply the number of units of a good or service sold by the average price per unit.
For example, if a company sells products that average $5 and sells 1 million units, that company’s revenue is approximately $5 million.