A business's gross revenue is the money generated by all its operations before deductions are taken for expenses. Revenue can come from the sale of the company's products or services, from the sale of surplus equipment or property, or from the sale of shares of stock in the company. It can come from a variety of other sources (both large and small) including such things as interest, royalties, and fees. In its simplest term, all the revenue of a business from all of its sources is added together to compute gross revenue. Gross revenue is generally referred to for a specific period of time, such as the gross revenue for the quarter or the gross revenue for the year.
The Distinction Between Sales and Gross Revenue
It's important to distinguish between gross revenue and the actual sales number in organizations—especially when there are multiple sources of revenue such as sales, interest, and other proceeds. The sales number is all proceeds from customers for the provision of goods and services, less any sales-related expenses. This is often referred to as net revenue or operating revenue. Gross revenue references the total amount of the sales contract, while net revenue reflects the amount billed to the customer at that point in time.
Analysis of Sales Numbers
It's important to identify the number that reflects the actual sales generated through the provision of goods and services for all comparison periods when you are evaluating company performance and comparing it to prior periods. Net revenue or operating revenue is useful for assessing trends and various measures and ratios of the efficiency of the company's sales and marketing efforts. Some ratios incorporate gross revenues as well.
A number of frequently referenced financial metrics that incorporate revenue totals include:
- Sales growth
- The compound annual growth rate in sales (CAGR)
- Gross and net profit margins
- Selling, general and administrative (SGA) expenses to sales
- Operating expense ratios
- Accounts receivable turnover
- Total asset turnover
- Fixed asset turnover
These and other ratios that incorporate revenue numbers are carefully scrutinized by a firm's management, as well as by external analysts, in order to gauge the overall health of a firm's revenue generation activities.
Pay Attention to Revenue Recognition Rules
Recognized revenue is the amount of revenue that's allowed to be recognized in the current period as governed by generally accepted accounting principles. For businesses that rely on long-term contracts (or in software subscription or software license maintenance models), the true picture of health is the amount of revenue that is able to be recognized in that period.
For example, an organization may contract for a sale with a value of $3 million over three years, but it is only allowed to recognize that revenue in one-year chunks of $1 million. A software license might call for a maintenance fee of $30,000 over three years, but the firm can only recognize the revenue in one-year chunks, one month at a time.
If the maintenance agreement is established at the six-month mark in year number one, the firm can only recognize half of the annual amount or 6/12 of the one-year fee of $10,000, or $5,000 for that particular year. If you have any questions whatsoever about these key issues, you should always consult a qualified accountant (preferably one familiar with your business) to determine the proper revenue recognition rules for your business.