Contents
What is revenue?
Revenue refers to the total amount of funds that a company or entrepreneur receives from its core activities. This includes all forms of payments, both cash and non-cash. A simple formula for calculating revenue is as follows:
Revenue = quantity of goods sold × price per unit of product
For example, if an entrepreneur sells wooden construction sets for 2000 rubles each and sells 15 items in a month, their total revenue would be 30,000 rubles. It is important to note that revenue is reflected in the company's financial results report, where it has the line item code 2110. For instance, the revenue of the "Ostankino Meat Processing Plant" can serve as an illustration of this indicator.
However, it should be remembered that revenue is not equivalent to all the funds in the company's accounts. For example, if part of the funds was received as an advance payment, it is not included in the revenue until all obligations are fulfilled. In the B2B segment, revenue is recorded only after the acceptance certificate is signed. A case where a customer ordered a bouquet of flowers and paid for it illustrates this situation: if after payment it turns out that some components for the bouquet are missing and the courier damaged the item, the money will have to be refunded, which can create financial difficulties.
Why calculate revenue?
Revenue is a key performance indicator for a business. The absence of revenue during a certain period is a warning signal indicating a lack of sales. Conversely, steady revenue growth indicates the continuity of turnover and the development of the company.
In accounting, detailed revenue reports help address several important tasks:
- Assessment of company performance: the dynamics of the indicator allow for conclusions about the success of the business.
- Comparison of the scale of activities of different companies: revenue is one of the key indicators in rankings such as Expert-400, Fortune Global 2000, and others.
- Analysis of product demand: studying revenue dynamics helps develop a strategic production plan and set development stages for the near future.
- Determining product pricing and production volumes: prices for goods and services are set based on revenue.
Revenue information is of interest not only to management but also to creditors, investors, and business partners; therefore, many companies present revenue dynamics in public reports. For example, the "Dodo Pizza" website displays the current revenue of the pizza chain.
Types of revenue
In the context of understanding what revenue is, various types are important. The most common are gross and net revenue:
Gross revenue
This is the total amount of funds from the sale of goods and services, which includes the cost of goods sold, tax payments, and mandatory contributions to the budget. Gross revenue, also known as revenue-brutto, influences the formation of payroll funds.
Net revenue
This is gross revenue minus VAT, excise taxes, and tax payments. Net revenue shows the real state of the business and forms its income, which is crucial for determining profitability or loss.
The difference between gross revenue and the cost of goods sold forms gross profit, while net revenue minus the cost of goods sold shows net profit.
How to calculate revenue
To calculate total revenue, the simple formula proposed earlier is used. However, it is important to understand that the potential for inflows can create confusion in accounting. For example, in one month, a company may account only for funds actually received, while in the next, it may account for all primary income and accounts receivable.
In commercial accounting, one of two methods for calculating revenue is usually applied, which is fixed in the company's accounting policy:
- Cash method: accounts for all cash inflows from core activities that have actually been received in the cash register or bank account. Potential inflows are not recognized as revenue. This method is simple to apply but may not accurately reflect the company's financial condition.
- Accrual method: recognizes all money that is due to be received in the account, even if it has not yet been received. This method provides a more accurate picture of revenues but requires careful accounting of potential inflows.
In practice, companies more often use the accrual method, which allows them to more accurately reflect financial results over a longer time period.