Gross revenue, also known as gross income or top line, is the total amount of revenue a business earns in a certain timeframe — usually in a year. Gross revenue does not take into account any factors like the overhead or cost of goods, it is only the calculation of how much money was earned before expenses, and other things are taken into account. So, for example, if you have a product on sale for $20, and it costs $6 to make, your gross revenue on the sale is $20.
When you begin looking into the profits and income and losses of your business, the gross revenue is how that is determined. As a business owner, you need to know how your business is doing financially, and the gross revenue is your starting point for that. Here, we will look at everything you need to know about gross revenue and how to calculate it for your business.
The Importance of Gross Revenue
Gross revenue is important because it shows the overall value of the company to its stakeholders. It allows investors to see how much money the company has earned to help them decide if they wish to invest in the company.
Depending on your industry, gross revenue may not be as important to your records. This is the metric that most other accounting is based on, but it is not the only number to focus on. For example, if you are in a service industry, you have fewer product returns, so gross revenue is a more important metric. However, if you are in the goods industry, there are more returns, which are not reflected in the gross revenue, so relying on it alone is not a good idea.
The reason you should not focus on gross revenue alone is because a business can have a large gross revenue while still not being profitable. If you ignore other factors and only look at this one, you can hurt your business in the long run.
Gross Revenue and Business Financing
If you are looking into getting financing for your business, your gross revenue is used to show that your revenue has been growing over time. The reason for this is because it shows that you are more likely to repay them. However, if your gross revenue is declining or has become stagnant, there is a higher risk to providing your financing. You will likely need some sort of collateral in order to secure financing if this is the case.
No matter what kind of business financing you are looking for, they will also look at other parts of the revenue your business receives, but the gross revenue is where they will start.
Gross Revenue vs. Net Revenue
You have probably heard the term net revenue too, which is slightly different than gross revenue. Net revenue is the bottom line, and it is the difference between the cost of goods and the gross revenue. So to use the above example again, if you sell that $20 product that costs $6 to make, the net revenue of it is $14.
Net Revenue = Gross Revenue — Costs
You can use gross revenue in conjunction with net revenue to see how a company is doing in both profits and expenses. They allow you to determine the overall financial health of a company. The two are intended to be used together, not separately, to give you the full picture of how the company is performing.
You cannot have a negative gross revenue because it does not factor any costs into the equation. You can, however, have a negative net revenue if your gross revenue is less than the costs of making your products and running your business.
How to Calculate Gross Revenue
Now that we know more about what gross revenue is and the role it plays in a business let’s take a look at how to calculate it.
Select the Timeframe
The first thing to do when calculating the gross revenue of a company is to select the timeframe to look at. It is usually calculated annually, but it can be calculated with any timeframe you choose.
Identify All Sources of Income
Once you have the timeline, the next thing you need to do is identify every source of income the business had during the timeframe you established. This can include sales, classes, interest from investments, and anything else that is considered an income during that time.
Add Income Together
You have found all of the income sources. Now add all of that together. That is your gross revenue.
Gross Income = Total Revenue
Gross revenue is an important part of the bookkeeping for any business. It is your starting point for other accounting and can help you secure investors and business financing. While it should not be the only number you look at when looking at the revenue for your business, it can be helpful for a number of things, and it is the easiest equation to determine.