What is Revenue?

Definition:

Revenue is the total income generated by a business through sales of products or services. It is also referred to as sales and is a measure of a company’s health.

🤔 Understanding revenue

Revenue is a key indicator of a for-profit company’s health. Typically, a high revenue is indicative of a strong, growing business. Weak revenue suggests a business may not be sustaining and growing. One can typically discover how well a business is doing by examining a company's earnings reports. These reports list revenue and other indicators such as expenses and profit. Gross revenue is calculated by adding all income generated from company sales during the time covered by the income statement. A related measure is net revenue, which is calculated by subtracting gross revenue from expenditures that reduce revenue, such as refunds and discounts.

Net revenue = Gross revenue - Total selling expenses

Example

Let’s take a look at revenue at play in the real-world.

  • Apple released its third quarter financial results on July 30, 2019. Its quarterly revenue earned between April and June 2019 was $53.8B.
  • The Walt Disney Company released its third quarter financial results on August 6, 2019. Its quarterly revenue was $20.2B.
  • AT&T announced its Second Quarter Financial Results on July 24, 2019. It reported $45B in revenue, $6B up from $39B in revenue from the second quarter of 2018.

Sources: Press statement by Apple dated July 30, 2019. Press statement by Disney dated June 29, 2019. Press statement AT&T dated July 24, 2019.

Takeaway

Revenue is like the pool into which companies pour all their gains...

It may come from different sources, but it gets measured on a balance sheet all at the same time. Unlike profit, revenue stays in the pool for accounting purposes even if a company spends it, and has no relationship with a business’s expenses. Revenue is a measure to consider while starting to learn more about a company’s performance. It makes for one piece of the puzzle in understanding the financial health of a business.

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What is revenue?

Revenue is the total money earned by a business during a defined period of time. Companies typically release quarterly and annual reports where they list their revenue on a balance sheet and compare it to their historical performance. This aligns with the way most governments require publicly-traded companies to file performance reports every quarter and once at the end of the year. Reporting standards and requirements vary from country to country. If you’re interested in a company’s revenue, look for its income statement.

On most income statements, revenue is typically the first item listed. Other measures like profit and gross margin depend on revenue earned by the company.

Any money a company earns through the sale of goods or services counts as revenue. Depending on where the money comes from, revenue can be categorized into:

  • Operating revenue: This comes from a company’s primary business pursuits. For example, real estate companies make their operating revenue through buying and selling real estate. Lawyers make money by providing legal services. Restaurants generate revenue by selling food.
  • Non-operating revenue: This is also referred to as operating income. It is money that comes from operations that aren’t part of the company’s primary business plan. If a real estate company earned interest on money in a bank account, that would qualify as non-operating revenue. Lawyers who sold a building they owned would receive non-operating revenue from the sale. Since non-operating revenue isn’t from the company’s main business activities, it is recorded separately on the income statement, below the gross margin line.

Gross margin = Operating revenue - Cost of goods sold

Since a business’s primary pursuits produce operating revenue, it tends to be more consistent month-to-month compared to non-operating revenue.

However, some money a company collects does not count as revenue. For example, if a company is selling a product or service that incurs a sales tax, the company will collect the tax, but won’t report it as revenue on its financial statements. That’s because the money belongs to the government and not to the business.

How does revenue differ from profit?

Unlike profit, revenue doesn’t account for a company’s expenses. Profit is calculated by subtracting the expenses from revenue. If a company makes more money than it spends, then it profits. If it earns less than it spends, then it incurs a loss.

In nearly every report, revenue will be positive. If you didn’t make any sales, revenue would simply be zero. In such a situation, any expenses incurred would result in loss.

In some rare cases, companies do report negative revenue. A negative value may be related to a change in accounting principles.. The accounting change alters the way the company places a value on money or assets. Despite changes in the books, the negative value may not represent a real decrease in revenue.

While profit is dependent on revenue, it is also dependent on expenses. A company’s revenue may rise, but if its expenses rise more, its profit will still decrease.

How is revenue calculated?

Revenue is the sum of all money brought in by the company, except for sales tax, that doesn’t belong to the company in the first place. Sales tax belongs to the city, county, state, or other government that oversees the area in which the company is based.

A smaller company with only one product or service and a single location would likely find it easy to calculate revenue. Add sales to any non-operating revenue earned, and you’ll have the total revenue.

A larger company with multiple divisions has a more complicated relationship with revenue.

Take, for example, The Walt Disney Company. In its 2019 financial statements, Disney breaks down its revenue by division. These include:

  • Media Networks: This includes revenue earned from the Disney Channel, ESPN, ABC, Fox, and other channels as well as radio stations owned by Disney.
  • Parks, Experiences, and Products: This includes the revenue generated at Disney’s theme parks and hotels, as well as revenue earned by the sale of merchandise.
  • Studio Entertainment: This includes the revenue from what Disney is likely most known for—Movies.
  • Direct-to-Consumer & International: This includes revenue earned from home video sales, as well as international revenue and money generated by Disney’s stake in the streaming service Hulu.

Source: Disney Press Statement, June 29, 2019.

AT&T breaks its revenue down into two categories:

  • Service
  • Equipment

Source: AT&T Press Statement, July 24, 2019.

There’s no perfect way to break down down revenue on a financial statement, but the good news is that companies report total revenue in their financial statements. That way, one doesn’t need to look into a company’s revenue by division, unless the goal is to learn more about where the company’s money comes from.

Is revenue the same as sales?

A company’s revenue may be equal to the sales it makes in a quarter or the year it’s reporting. That’s why you may hear revenue being frequently referred to as ‘sales revenue.’ There are, however, sources of revenue (aka non-operating revenue) that aren’t sales-related.

The revenue brought in by a company’s sales is its operating revenue. Non-operating revenue typically comes from sources other than sales. For example, if a company owns shares of another company’s stocks, any dividends paid on those stocks will count as revenue. Similarly, dividends paid on federal bonds would count as revenue.

What is total net revenue?

Total net revenue, often referred to as “net revenue,” is a company’s total revenue factoring out any losses caused by discounts and returns

Net Revenue = Revenue - (Discounts + Returns)

For example, a hypothetical company sells pool noodles received $1M in revenue in a quarter. But, customers returned $100,000 of noodles across that quarter perhaps because they bought the wrong item, ended up not needing it any more, or because it was damaged on arrival. The company also issued rebate coupons that led to it returning $50,000 to its customers.

Total Revenue - Money lost due to returns and rebates = Total net revenue $1M - ($100,000 - $50,000) = $850,000

When calculating net revenue, businesses ignore expenses. Instead, net revenue determines the difference between the money the company would receive without discounts or rebates, and the money it actually received with discounts, rebates, and returns factored in.

What is the difference between revenue and income?

Revenue and income are closely related since, in part, income depends on revenue. The differences between these numbers become more evident when we deal with their “net” variants.

Net revenue is the amount of revenue left after accounting for returns, discounts, and rebates. Net income, sometimes called net profit, is the amount of money remaining after accounting for all business expenses. This includes, but is not limited to:

  • the cost of making any goods you sell
  • the cost of providing any services you provide
  • other expenses like wages, rent, utilities, and office supplies.

The primary difference between the two is that net revenue doesn’t factor in expenses. Instead, it only looks at events where the company earned less than expected. Net income differs in that it accounts for all expenses.

You can typically find net income on financial statements. While revenue is almost always mentioned up top on statement, net income is likely to appear at the bottom.

Let’s take a look at a real-world example of net revenue and net income.

In 2019, Nvidia, a technology company, reported $11.7B in revenue and $4.14B in net income. The previous year, it reported $9.71B in revenue and 3.05B in net income. The year before that it had $6.91B in revenue and $1.66B in net income.

While this example shows a company with growing revenue and net income, a company can also experience an increase in revenue and a decrease in net income. This could happen if expenses grow at a faster rate than sales.

Source: Nvidia Annual Report, April 2019

What is revenue collection?

In discussions relating to revenue, you may hear references to “revenue collection.” Revenue collection has little to do with the way businesses operate and instead refers to something the government does: Collect taxes.

That’s right, revenue collection can be used as a shorthand to refer to tax revenues. It may also refer to other kinds of money the government receives from licensing fees, tickets, or fines. Consequently, the government doesn’t earn revenue from sales of products or services.

Your contribution to revenue collection may be through the income tax you pay the government.

In the US, the organization overseeing that collection is the Internal Revenue Service, or IRS. Many states, counties, and cities have their own departments of revenue tasked with collecting payments owed to branches of the local government. This varies by location, but could be related to unpaid parking fines, property taxes, or judicial fees.

Like the government, non-profit organizations may also have revenue that doesn’t come from sales. Instead, these organizations largely rely on charitable donations from individuals and companies. While non-profit organizations may still have non-operating revenue, most of their revenue comes from donations and other gifts.

Registered nonprofits are still required to file a tax return, even though they don’t owe the government taxes. Like with business financial reports, most non-profit financial reports list revenue first. Form 990, which the government requires most nonprofits to file, lists the revenue for the two years. This can help you get a quick snapshot of funds raised by a nonprofit. 20200103-1048598-3152899

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