Understanding revenue gives you an insight into how your business is performing. And while the calculation is fairly straightforward, there are different kinds of revenue – each one telling you something important about the health of your business and the effectiveness of your decisions.
Before we explain the different formulas for calculating revenue, let’s review some key terms you’ll need to know to make the calculations:
- Revenue – The amount of money obtained from the sale of goods or services. Total revenue is the amount of income from all sources.
- Profit – How much the total revenue exceeds the total expenses.
- Expenses – What it costs to make a sale, including:
- Cost of goods sold (COGS) – The direct cost of making or developing a product or service. For a product, this can include the cost of materials, shipping and storage costs, and employee hours. For a service, this can include employee hours, licensing fees, equipment/tool costs, and related costs.
- Operating expenses – Normal business expenses like building rent or maintenance, employee salaries, administrative costs, marketing and advertising, etc.
Now, let’s start exploring the different forms of revenue and their formulas. To make things simpler, let’s say you run an online music streaming service like Pandora or Spotify. You have only one offering – a paid monthly subscription. How would you go about calculating the different types of revenue your company is bringing in? In this article, we’ll discuss total revenue, net revenue, annual recurring revenue, and deferred revenue.
Total Revenue Formula
What Is Total Revenue?
The total revenue is all the income acquired during a specific time period (month, quarter, year, etc.). Calculating it is simple: multiply the number of goods sold by the price.
Total Revenue Formula:
Goods Sold x Price = Total Revenue
In our example, let’s say the price of a monthly subscription is $10 and we have 100,000 subscribers. This makes our total monthly revenue $1,000,000.
Why Is Total Revenue Important?
Total revenue is a rough guide to the health of your business. If your total revenue is low, things need to be adjusted. But if your total revenue is high, it doesn’t automatically mean you’re doing well. You could have a high total revenue and a low net revenue.
Net Revenue Formula
What Is Net Revenue?
Net revenue is what’s left when you subtract how much it costs to produce a product from your total revenue. In other words, it’s your income minus some of your expenses.
When calculating net revenue, subtract the cost of goods (COGS) from the total revenue:
|Net Revenue Formula Total Revenue – COGS = Net Revenue|
Continuing our example, let’s say that we spend a total of $5 per subscription on things like web hosting, service providers, and music licensing fees. This makes our net revenue $5 per customer. If we have 100,000 subscribers, our monthly net revenue is $500,000. ( If you have returned goods, their price is deducted from your net revenue as well.)
It’s important to note that net revenue is not the same as profit; other operating expenses (e.g. administrative, marketing, etc.) must be subtracted from the net revenue to get the profit.
Net Revenue vs. Gross Revenue vs. Profit
What’s the difference between net revenue and gross revenue? Gross revenue is simply another term for total revenue; it’s all the income without anything deducted from it. Net revenue is the income less any expenses specifically related to producing the good or service. Profit is whatever income is left over after all expenses are subtracted.
Why Is Net Revenue Important?
Net revenue gives you a better understanding of your company’s health. It can also help you decide where to make adjustments. If your total revenue is high and your net revenue is low, you might look for areas where you can cut costs.
Knowing your net revenue also helps you avoid overspending. If you think you have $1 million in profits and you decide to invest $400,000 in expanding your business, you’ll be in a bind when you realize that your net revenue is really $300,000.
Additional Revenue Formulas:
Finally, let’s look at two other revenue formulas: annual revenue and deferred revenue.
Annual Recurring Revenue
If you’re running a subscription service like our fictional music streaming company, annual recurring revenue is something you really need to understand.
Annual recurring revenue (ARR) is the amount of money that comes in each year from a recurring purchase (like a subscription). Let’s say we decide to sell yearly subscriptions for $100 and we attract 1,000 new subscribers to this plan. Our annual recurring revenue for this would be $100,000. Now let’s say we think further out of the box and offer a 5-year subscription for $400. If we get 500 subscribers to this plan, our ARR is calculated as follows:
Total revenue from plan $200,000
Divided by number of years 5
We can expect to get $40,000 in revenue each year for the next 5 years from this plan.
Deferred revenue is a bit of an outlier because it’s not treated as revenue: it’s treated as a liability. This is because deferred revenue refers to the money earned from something that hasn’t been fulfilled yet.
Let’s switch from our music subscription service example to an example of a store that sells vinyl records. If 100 customers pre-order a $25 new record that’s coming out in two months, that $2,500 is deferred revenue. Until the record is in the customer’s hands, there’s a chance that it may not be delivered – and we’ll have to give their money back. And we certainly don’t want to spend that money until we have it!
Helpshift Resources To Support Revenue Growth
Customer Service Product: In-App Help
Customer Service Product: Chat and Conversational Help