Gross Revenue, also known as Gross Sales or simply as Revenue, refers to the total revenue generated by a company from its sales of goods or services before any deductions, allowances, or discounts are applied. It represents the inflow of funds resulting from the company’s revenue-generating efforts and does not include any non-operational sources of income.
Gross Revenue provides insights into the company’s overall sales volume and the size of its business operations. It is helpful for understanding a company’s revenue-generating capacity but does not reflect the actual amount of money the company will ultimately collect, as it doesn’t account for reductions or adjustments. For a more accurate view of revenue collection, Net Revenue or Net Sales is typically used, which subtracts deductions such as returns, allowances, and discounts from Gross Revenue.
What is Gross Revenue?
Gross Revenue is a financial metric that represents the total revenue generated by a company from its core business activities like sales of goods or services before any deductions, allowances, or discounts are applied. It is also referred to as Gross Sales.
Gross Revenue is sometimes known as Gross Sales because the two terms essentially refer to the same concept in financial accounting and reporting. They are often used interchangeably to describe the total revenue generated by a company from its sales of goods or services before any deductions or adjustments are made.
Gross Revenue is the starting point for calculating Net Revenue of a company. Since it does not take into account any deductions, allowances, or discounts, it represents the maximum potential revenue from sales.
After calculating Gross Revenue, a company may make adjustments to arrive at Net Revenue or Net Sales, which deducts returns, allowances, and discounts to provide a more accurate view of the revenue that the company is likely to recognize as income.
Gross Revenue Definition
Gross Revenue is the total amount of money generated by a company from its core business activities.
Gross Revenue is calculated before accounting for any deductions, allowances, or discounts.
Gross Revenue Formula
The formula for calculating Gross Revenue (or Gross Sales) is:
Gross Revenue = Total Units Sold × Sales Price per Unit
Total Units Sold: This represents the total quantity of goods or services that a company has sold during a specific period, such as a quarter or a year.Sales Price per Unit: This represents the price at which each unit of the company’s product or service is sold to customers.
In income statements, companies typically show Net Revenue (or Net Sales) rather than Gross Revenue (or Gross Sales) as the top-line figure.
Net Revenue (or Net Sales) provides a more transparent view of a company’s revenue because it reflects the actual income the company expects to receive after accounting for reductions due to returns, allowances, and discounts.
Accounting standards such as Generally Accepted Accounting Principles (GAAP) often require companies to report Net Revenue as the primary revenue figure.
How to Calculate Gross Revenue?
To calculate Gross Revenue, follow these steps:
- Identify the sources of Revenue related to your core business.
- Determine the total Sales or Income for each revenue source identified.
- Do not subtract any deductions or discounts.
- Add up the revenue from each source.
Let’s consider a fictional retail company that sells electronic gadgets.
Revenue Sources:
- Sales of Electronic Gadgets: $500,000
- Extended Warranty Sales: $50,000
- Accessories Sales: $75,000
- Repair Services: $30,000
Calculating Gross Revenue:
Gross Revenue = Total Income from All Sources (Before Deductions or Discounts)
Gross Revenue = $500,000 (Sales of Electronic Gadgets) + $50,000 (Extended Warranty Sales) + $75,000 (Accessories Sales) + $30,000 (Repair Services)
Gross Revenue = $655,000
So, the Gross Revenue for this retail company is $655,000. This represents the total income generated by the company from its core business activities before any deductions or discounts are applied.
Examples of Gross Revenue
Consider a fictional company which manufactures a software product.
Let’s assume the company generated the following revenue from its various activities during a specific period:
- Software Product Sales: $500,000
- Subscription Model: $150,000
- Upgrades and Add-ons: $75,000
- Maintenance and Support: $100,000
- Training Services: $50,000
- Customization Services: $80,000
- Interest Income: $60,000
- Gains from Asset Sales: $95,000
Since this is a software company, let’s identify which of the above items pertain to its core business.
The company can engage in various primary activities related to software, such as selling its software product, offering software on a subscription model, providing software upgrades and add-ons, delivering maintenance and support, offering software training, and providing software customization. Hence items 1 to 6 can be considered part of its core business activities. These activities are considered while calculating the Gross Revenue.
However, the company can also earn interest on its bank accounts or investments and generate income from selling assets such as surplus equipment or unused office properties. These activities are not part of the company’s core business. Therefore, they cannot be considered when calculating Gross Revenue. Such items can be categorized as Non-operating Revenue and included in the Other Income (Expenses) section.
Using the figures provided, let’s calculate the company’s total operating revenue:
Gross Revenue = Software Product Sales + Subscription Model + Upgrades and Add-ons + Maintenance and Support + Training Services + Customization Services
Gross Revenue = $500,000 + $150,000 + $75,000 + $100,000 + $50,000 + $80,000 Gross Revenue = $955,000
Gross Revenue and Net Revenue
Gross Revenue and Net Revenue are distinct financial metrics that differ significantly in their calculations and purposes.
Gross Revenue represents the total revenue generated by a company from its sales of goods or services before any deductions, allowances, or discounts are applied. It’s the total possible sales income.
Net Revenue represents the revenue a company expects to realize from its sales of goods or services after accounting for deductions, allowances, and discounts. It reflects the revenue the company is likely to collect.
Imagine a company that manufactures and sells electronics. In a particular month, the company sold 1,000 laptop computers to various customers at a price of $800 each, resulting in a Gross Revenue of $800,000 (1,000 units x $800).
However, after the sales were made, some customers discovered minor cosmetic scratches on a few laptops. To resolve the issue and maintain good customer relations, the company decided to offer a sales allowance of $50 for each affected laptop.
Number of Affected Laptops: Let’s assume that 20 laptops out of the 1,000 sold had these scratches.
To calculate the impact of sales allowances on Net Revenue:
- Calculate Gross Revenue: Gross Revenue before allowances is $800,000.
- Calculate Total Sales Allowances: Total Sales Allowances is the number of affected laptops (20) multiplied by the sales allowance per laptop ($50). So, Total Sales Allowances = 20 laptops x $50 = $1,000.
- Calculate Net Revenue: Net Revenue is Gross Revenue minus Total Sales Allowances. Therefore, Net Revenue = $800,000 (Gross Revenue) – $1,000 (Sales Allowances) = $799,000.
So, the Net Revenue for this month would be $799,000, reflecting the fact that the company made allowances to compensate for the minor defects in a portion of the laptops it sold.
Net Revenue provides a more accurate representation of the revenue the company expects to realize after accounting for these types of deductions.
In the above example, we have not taken into account other items such as Sales Returns and Sales Discounts when calculating Net Revenue. A more detailed discussion about Net Revenue will be covered in the next article.
What Does Gross Revenue Tell You About a Company?
Business Activity Strength: A higher Gross Revenue generally indicates that a company is actively engaged in its core business activities and has a strong market presence. It can be a sign of a healthy business operation.
Total Sales Volume: Gross Revenue reveals the total amount of money a company has earned from its primary revenue sources, such as the sale of products, services, or other income-generating activities. It represents the company’s ability to generate sales.
Gallop Insights
Though Gross Revenue is not always explicitly listed on an Income Statement (Profit and Loss Statement), it serves as the starting point for calculating a company’s Net Revenue (also known as Net Sales). Net Revenue offers a more accurate picture of the revenue a company is likely to collect and recognize as income. It accounts for factors that reduce actual revenue collection.
While Gross Revenue provides valuable insights into a company’s sales and income generation, it does not reflect the company’s profitability.
