From Business News Daily By Dock David Treece
Gross revenue and net revenue are distinct from each other, but both are important for small businesses to track.
- Gross revenue is the amount of money a business brings in from sales in a given period.
- Net revenue is the amount of money a business brings in from sales in a given period minus the expenses it incurred over the same period.
- Gross revenue tells you how many sales your business is driving, while net revenue compares your income to your expenses.
- This article is for business owners who want to improve their financial literacy and accounting practices.
In accounting, a company’s gross revenue is its total gross sales over a certain period of time. It’s all of the money the business received, not accounting for any expenses whatsoever. Net revenue, or net income, is equal to a company’s gross revenue minus all of its expenses, including fixed expenses.
It’s important to know the difference between the two, because gross revenue only provides part of your company’s overall picture. You can’t budget based on your company’s gross sales. Net income provides a much more comprehensive view, but it’s hard to interpret without gross revenue for context.
What is the difference between gross revenue and net revenue?
The difference between your gross and net revenue is equal to your company’s expenses. These include the direct costs of goods sold (costs that are directly allocable to particular units or product lines) as well as other variable expenses and fixed costs (overhead).
Gross revenue - Expenses = Net revenue
Here are some things that account for the difference between gross and net revenue:
- Cost of goods sold: This is the direct costs your company incurs to manufacture goods or purchase inventory.
- Marketing costs: These include the costs of advertising, web development, and other brand-building or marketing efforts.
- Office supplies: These are everything you use in the office, from paper clips to toilet paper.
- Rent and utilities: This means payments for facilities, electricity, water and related services.
- Employee compensation: This includes salaries, wages, commissions and employee retirement benefits.
- Taxes: Payroll taxes, excise taxes, sales tax and income tax are all deducted before you arrive at net income.
- Legal and administrative costs: Any fees paid to lawyers, accountants and other consultants come out of your net revenue.
- Technology: This includes costs for software and other subscriptions or licenses.
While interest payments are another item that you’ll deduct from your gross revenue to calculate your net revenue, dividend payments usually are not. Those payments are deducted later in your business’s accounting process after you’ve calculated net revenue.
Key takeaway: Net revenue measures how much money your company brought in after accounting for all expenses in the same period.
Gross revenue reporting
You’ll report your business’s gross revenue on your income or cash flow statement as top-line revenue. It’s equal to your gross sales – the total amount your company took in over a certain period of time.
Gross revenue doesn’t really have a formula, but this is what it would look like:
Total sales over covered period = Gross revenue
Gross revenue is a relatively easy number to calculate and to report using small business accounting software – it’s just the total money that came into your business during the reporting period (in the form of sales, not capital contributions or loans).
This figure does not take into account any costs you incurred to produce the sales that generated that revenue.
Net revenue reporting
While still quite straightforward, net revenue is slightly more challenging to report because it involves a few more calculations. In accounting, your company’s net revenue is your bottom line – equal to your gross revenue for the reporting period minus all expenses you incurred over the same period.
Here’s the formula for net revenue:
Gross revenue - Cost of goods sold - Overhead - Other variable expenses = Net revenue
You’ll use this formula to calculate how much of your business’s gross income is left over after accounting for all of the company’s expenses. It reflects your company’s total profit over a particular period.
Gross vs. net revenue examples
Consider a retail clothing store that has $250,000 in sales over a particular quarter. That $250,000 is the company’s gross revenue for the quarter.
Beginning with gross revenue, the store’s owner or manager then subtracts the cost of goods sold (the amount the store paid to acquire inventory); the rent for the storefront; utility costs; compensation paid to store employees; expenses for office supplies; payroll, income, sales and excise tax; expenses for office supplies; interest expense for money borrowed to buy inventory; and all its other costs. The amount remaining after all of those items are deducted is the store’s net revenue.
When to use gross vs. net revenue
Gross revenue is extremely helpful for tracking your sales volume and ensuring that your company’s market share is growing and that your salespeople are hitting their goals. However, it provides little insight into your company’s overall profitability.
Net revenue, on the other hand, is great for tracking your profitability and provides considerably more insight than simple gross revenue. But net income also has its limits. For example, as net income fluctuates, you can’t immediately tell why. Without looking at your gross revenue over the same period, you can’t tell whether your business’s net income is changing because of fluctuations in sales or expenses.
Key takeaway: Gross revenue and net income are both useful to track. You need to know both in order to expand strategically and ensure sufficient cash flow to support operations while growing the bottom line.
Gross vs. net revenue ratios
Gross and net revenue are both regularly used in ratios and other metrics to indicate a company’s financial strength and performance.
Gross profit ratio is one metric that provides key insights as to the profitability of your specific products or services. Also called gross profit margin, gross profit ratio is the percentage of gross sales of a particular product or service that is profit above the cost of producing that good.
Gross profit ÷ Net sales = Gross profit ratio
In this formula, net sales equals your gross sales minus returns minus the cost of goods sold.
Did you know? Your gross profit ratio measures the profitability of your specific product lines, answering the question of whether certain products are profitable to make and sell.
Net profit margin, also called return on revenue, is another metric based on your company’s revenue – this time your net revenue.
(Revenue - Cost) ÷ Revenue = Net profit margin
In other words, your net profit margin is your business’s overall profitability, accounting for all fixed expenses and overhead.