Revenue is a vital part of your business. Your business needs revenue to survive. So, it’s important that you understand revenue.
Below you will learn what revenue is, why revenue is important, how to calculate it, and how to increase it.
What is revenue?
Revenue is the money your business receives during a certain accounting period.
Revenue is also called the top line because it is the first item listed on your small business income statement. You subtract business expenses from revenue to get your company’s bottom line.
You will determine your revenue differently depending on if you use accrual or cash accounting. In accrual accounting, you include sales made on credit as revenue, as long as you have given the goods or services to the customer. In the cash method of accounting, you only include sales as revenue if the customer has paid you.
The two types of revenue
There are two types of revenue: operating and nonoperating revenue.
Operating revenue is revenue your company earns from its main business activities. For example, sales to customers are operating revenue.
Nonoperating revenue is revenue your company earns from activities that aren’t directly related to your business. For example, you might earn nonoperating revenue from investing or renting your building to another business.
Why is revenue important?
Revenue is what keeps your business alive. Beyond being a lifeline, revenue can give you key insights into your business.
If you want to increase your business profits, you need to increase your revenue. By keeping an eye on your revenue and focusing on increasing it, you can also increase your profits.
By tracking your revenue across consistent accounting periods, you can compare it over time. For example, you can compare your business revenue between years or quarters.
You will also use your revenue for tax reporting. You will subtract your expenses from your revenue to determine your business’s taxable profits.
Revenue formula
To calculate revenue, you need to know a few numbers.
First, calculate your operating revenue. Multiply the number of goods or services sold by the price you sold them for. For example, if you sell 300 pairs of shoes at $80, your operating revenue would be $24,000 (300 x $80). Do this for all the products or services you sold. Add together all your operating revenue.
Next, calculate your nonoperating revenue. Simply add together all your earnings from non-business activities.
Finally, add together your operating revenue and non-operating revenue.
Total revenue = operating revenue + nonoperating revenue
Ways to increase revenue
You can take steps to increase your business’s revenue.
You might increase the prices of your products or services. Assuming you maintain the same number of sales, your revenue will increase from the price increase. You do need to be careful though because some customers might take their money elsewhere when you increase your prices.
Try increasing the number of new, individual customers you have. You might need to increase your marketing or expand your target market.
You might try to increase the average amount customers spend per transaction. To do this, you have to convince customers to buy more. You need to offer incentives. You might have sales, bundle products, or give free samples when customers spend a certain amount.
Increasing customer frequency can also increase your revenue. When customers purchase more often, you will have a larger and more consistent influx of revenue. Special promotions and sales can encourage more frequent purchases.
You need a way to record your revenue and generate reports. Check out Patriot’s online accounting software. It’s made for small businesses, so you don’t need to be an accountant to use it. Get your free trial.
This article is updated from its original publication date of April 10, 2018.
This is not intended as legal advice; for more information, please click here.
