Many small-business owners make the mistake of seeing sales and revenues as synonymous, which can lead to less effective planning and results tracking. Sales have more to do with the volume of business transacted, while revenues are the amounts of money generated from sales. Neither gives you an exact picture of profits or margins, but they are tools you can use to analyze your marketing efforts.
Sales occur when someone pays you for your product or service. You can increase sales and still lose money. If you don’t correctly calculate your cost of production and overhead, you might set your prices too low, losing more money as sales go higher. Total sales refers to the total number of units you sell, regardless of how much money you bring in or whether or not you make a profit. If you use the term “sales” to refer to the amount of money you bring in, your total sales would be your total dollar volume.
Revenues are the monies you generate from sales or other activities. For example, if you sell 100 tennis rackets at $30 each, your total revenue from those racket sales is $3,000. If you sell 50 tennis rackets for $70 dollars each, your total revenue for those sales is $3,500. Your total racket sales are 150 and your total revenues are $6,500. Increased revenue doesn't necessarily mean you are making a profit or you have more money to spend on advertising or salary increases or to pay down debt or purchase new machinery. You can also generate non-sales revenues from interest earned, royalties, commissions and other means.
Products or services that produce the highest sales and highest revenues aren’t always your best bets for profitability. For example, looking at the tennis racket example, the lower-selling racket produced the higher total revenue because of its higher price. Your biggest revenue producer, however, might not be the product you want to focus on.
If one of your products generates the most revenue but costs more to produce and sell, your profit margin will be lower. For example, the tennis rackets that produced $3,500 in revenue might only have produced a profit margin of $1 per racket, while the rackets that only produced $3,000 in sales turned a profit of $3 per racket. Setting sales staff quotas and commissions might motivate your staff to sell more of your less-profitable items.
When analyzing your sales, revenues and profits, look at the return you get from your investment. A more profitable product might cost you more money to sell. For example, if you make a larger profit on one product than another, but the more profitable product gives you a 2 percent return on your investment and the less-profitable product gives you a 10 percent return on your investment, you’ll need to invest more money to make a profit.
If you can take your money and invest it in a financial instrument that gives you a 3 percent return on your investment, it might make more sense to do that than to sell the product that made you a 2 percent return. A better option might be to increase sales of the product that brought you a 10 percent return on your investment, even if it has lower profit margins or total profits. You won’t need to invest as much and can use your extra cash for something else.
Carefully analyze the combination of sales, revenues, margins and return on investment that produces the best results for you. Successful small businesses look for the right combination of sales potential, revenue development and profit margins to maximize their return on investment or profit, depending on how much money they have to work with. For example, if you have a small amount of money to invest, you might want to maximize your total profit from that investment, rather than your percentage profit. If you have considerable funds to invest, maximizing profits with a product that gives you a small return on your investment prevents you from using funds for other more lucrative investments.