Net Vs. Gross Revenue

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If you sell a dozen cars for $30,000 each, your gross revenue is $360,000. If two of your customers return their cars for a full refund, your net revenue is $300,000. So far, so good. But if you're trying to figure out how profitable your business is, neither figure gives you the whole story because they don't consider all your expenses.

TL;DR (Too Long; Didn't Read)

Gross revenue is the sum of all the revenues you earn. Net revenue is gross revenue minus the costs associated with returned goods and sales discounts.

What is Gross Revenue?

You can find gross revenue for any business at the top of their income statement. It's the total of everything the company made from selling goods or offering services. If you want to calculate your business's gross revenue, add up everything you've earned from sales and services to get the figure.

Be aware, however, that gross revenue may not represent all the money the company has coming in. If a business invests its money in an interest-bearing account, stocks or bonds, it may have income from those sources, too. The income statement separates investment income from sales income. Anyone reading an income statement wants to know how much money the company earns from its operations. Lumping in investment revenue with operational revenue would make it harder to figure out.

If your company relies on cash accounting, you only recognize revenue when you get paid. If you use accrual-basis accounting, you record it when you earn money. If you close a $5,000 sale this week, that counts as income even if you won't be paid until next month.

What is Net Revenue?

Net revenue is the next step down on the income statement. It's your gross income, adjusted for discounts and returns, but not for the expenses involved in closing the sale.

When accountants draw up a formal income statement, they have to consider the possibility of returns. If you sell 500 cell phones the last week of the quarter, it's possible some of them are defective, so customers will want to return them. The accountant has to include an allowance for potential returns when calculating net income. If the returns are more than expected or less, the accountant adjusts it down the road.

Net revenue gives you a more accurate picture of sales income than gross revenue. But by itself, it can't tell you how profitable your business is, any more than gross revenue can – that will take some number crunching.

Going Down the Statement

After reporting net revenue on the income statement, you subtract the cost of goods sold to get your gross income. Cost of goods is the money you spent to make money from a sale. If you're making a tailored suit, it includes the cloth and the work-hours required to stitch the outfit. If you're selling retail, it includes whatever your inventory cost you to buy.

From gross income, you subtract operating expenses such as sales, administrative, rent and depreciation costs. That gives you your operating income. If you want to evaluate a business's performance, including your own, this is the line to pay close attention too. It gives you a better idea of your profitability than the net or gross revenue.

References

About the Author

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