Sales revenue is the money you make selling goods or services. Gross sales revenue is the total sales amount; net sales revenue is the gross total less any returns or refunds. The gross sales revenue formula is simple: Add up your sales for the year, month or quarter and you've got the number. You report it at the top of your business's income statement.
Cash or Accrual Accounting
Standard accounting practice gives you two options for figuring your income, cash and accrual. In cash accounting, you only report sales revenue when you receive a payment. Accrual accounting reports revenue when you earn it.
For instance, suppose you're a landscaping company that does $2,000 of work on a yard. If you work on a cash basis, you record the sale in your accounts when your customer pays you, whether with cash, check or credit card. Accrual accounting records the $2,000 when you finish the work. If you did the work on credit, you enter it as accounts receivable, then transfer the revenue to cash when the money comes in.
The difference between accrual and cash is important when you're preparing your taxes. Suppose you complete the $2,000 job on the last day of the year but don't get paid until a month later. Under accrual accounting, you earned taxable income on December 31. If you work on a cash basis, it's not taxable until the following year.
The Sales Revenue Formula
You don't need a special sales revenue calculator to crunch the numbers; the regular calculator on your phone will do fine. Take your total cash or accrual sales for the period and add them up to figure your gross revenue. Subtract any refunds or returns on sales and you have net revenue. That's the sales revenue equation.
Calculating the income you made from your sales is more complicated. Suppose you're drawing up the company's income statement for the past quarter. At the top of the statement, you put the net sales revenue. Then you subtract the cost of goods sold to get gross profit.
Gross Profits to Net Income
From gross profit, you subtract your operating expenses. This includes the cost of sales commissions, advertising and administrative expenses, such as office supplies. Gross profit less operating expenses gives you the company's operating income.
If the company has nonoperating income, such as interest on investments, you add that in. You also subtract nonoperating expenses, such as losses from a lawsuit or investments. Operating income plus total nonoperating income gives you net income, AKA net profits. If you have no nonoperating income or expenses, you get to skip those steps.
Understanding Sales Revenue
If you're reviewing your company's performance, sales revenue is an important metric. You don't look at the total sales amount for the quarter or the month in isolation, though. You have to compare it to other figures:
- How does sales revenue compare to previous periods? Ideally, it's going up, not down.
- How does it compare to your projected revenue?
- What percentage of sales revenue is converted into net profit?
- Has that percentage changed over time? If it's dropped, that could be a sign that revenue is getting eaten up by expenses.
Sales and Cash Flow
If you work on an accrual basis, your company needs a cash flow statement along with the income statement. The income statement tells you how profitable your company is. The cash flow statement tells how much money you have flowing into your accounts. It's important to track both.
Cash flow is important because even if your sales revenue is great, you can't pay bills out of money your customers haven't paid you. Having $100,000 in accounts receivable doesn't enable you to pay employees, suppliers or the landlord. Only cash does that. If your cash flow lags way behind your sales revenue, you may need to push for faster payment from your customers to stay afloat.
Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com