By Indeed Editorial Team
March 23, 2021
Healthy cash flow is essential for a company's financial stability. Though having various expenses is inevitable as a business owner, having a greater profit or total revenue overall means you'll have the means necessary to maintain operations. Calculating your total revenue and understanding the various types is key when it comes to working in sales.
In this article, we will define total revenue, explain the difference between net revenue and gross revenue and guide you through the steps for how to calculate total revenue for your business.
What is total revenue?
Total revenue, also known as total sales, refers to the total income that your company generated from all sales of goods or services. If you own an ice cream shop, for example, your total revenue would include all ice cream sales, not just the sales from one flavor or type of sundae.
Determining your company's total revenue can be a useful determinant in evaluating its financial health. The larger your total revenue is, the more money your company is generating. This can be particularly helpful if you have many expenses that need to be covered. Having a large total revenue means you'll likely have enough income to cover these expenses and the means to stay afloat and profitable for the foreseeable future.
Related: Learn About Being a Financial Analyst
Net revenue vs. gross revenue
The better you're able to understand how net revenue and gross revenue differentiate, the more easily you'll be able to determine their part in your company's finances. Net revenue is the revenue your company receives after subtracting any expenses such as the cost of goods sold from that revenue.
For example, if you're selling a sweater for $50, the fees for shipping, production, storage and more would be deducted from the $50 to result in your net revenue. To make a sizable profit, your company's revenue should be far greater than its expenses. In contrast, gross revenue is your company's revenue before these deductions being taken out. Using the example above, the gross revenue would be $50.
Though business owners want to be profitable and focus on their ability to generate revenue, they need to consider their expenses, as well. These expenses can include employee salaries, building costs, office supplies, utility bills and more. Many of these expenses could also wind up being one-time fees.
Because of this, your company's gross revenue can help investors and lenders to more accurately see your ability to turn a profit. The greater your total revenue, the greater your chances are of qualifying for a loan or gaining an investor.
It's also important to recognize that gross revenue and total revenue have their differences, too. Whereas gross revenue takes into consideration the sales of a good or service, total revenue looks at all of a company's income.
Related: Gross Pay vs. Net Pay: Definitions and Examples
How to calculate total revenue
The better you're able to understand total revenue, the more accurate your calculations will be. A simple way to calculate your company's total revenue is to first determine the total number of units your company sold and the average price per unit sold. Your total revenue is dependent on these two values. Then, to determine your total revenue, simply multiply the number of units sold by the average price per good. Interest or dividends should also be added to determine your total revenue.
Use the following formula when calculating your company's total revenue:
total revenue = (average price per units sold) x (number of units sold)
If you're a service-based business, substitute the average price per unit with the average price per service sold and the number of units sold with the number of services sold. For example:
total revenue = (average price per services sold) x (number of services sold)
The resulting value in these calculations is your total revenue. Make sure that you're accounting for any monetary change in your company's financesno matter how big or small.
For example, if you were to change the price of the unit or service sold, you'd need to account for this change because it has the potential to skew your calculations. Also, be sure to include any non-operating revenue such as investment gains or dividend income in your calculations.
Related: Learn About Being an Accountant
What to do after your total revenue calculation
Once you have your total revenue, you can compare it to your total expenses and determine whether or not your company is making a large enough profit to continue operating. If your expenses are far exceeding your total revenue, your company is facing a deficit.
If your business is salvageable, you'll need to adjust your company's budget and finances accordingly. Adjusting the prices of your goods and services is one way to increase revenue. If you increase prices, however, some consumers might not want to buy any of your goods and services at all anymore. Make sure your price adjustments are worth it in the end.
By calculating your total revenue, you'll also be able to compare it to that of year's past to determine any revenue growth through the years. To do this, subtract one year's total revenue from the other's.
Example calculation of total revenue
When calculating your total revenue, it can be helpful to use other scenarios to guide you. Here is an example of a total revenue calculation:
Let's say you have a bakery and you're deciding whether or not to continue operating in the coming year. To do so, you calculate your total revenue. You've determined that you've sold 40,000 baked goods at an average price of $5 per unit. To calculate your total revenue, you'll multiply the number of baked goods sold (40,000) by the average price per good ($5). Your formula should look like this:
total revenue = (total number of goods sold) x (average price per good sold)
total revenue = (40,000) x ($5)
total revenue = $200,000