What Is Revenue? Formula, Calculation, and Examples

What Is Revenue?

Revenue is the amount of money generated from normal business operations and is calculated as the average sales price multiplied by the number of units sold. It's the top-line figure from which costs are subtracted to determine net income. Revenue is also known as sales on the income statement.

• Revenue, often called sales or the top line, is the money earned from normal business operations.
• Operating income is revenue (from the sale of goods or services) minus operating expenses.
• Non-operating income is irregular or non-recurring income from auxiliary sources (e.g., money gained from a lawsuit).
• Non-business organizations like governments, non-profits, or individuals also report revenue, although the calculations and sources of income differ.
• Revenue is solely the money earned from sales, whereas income or profit includes the costs to generate the revenue and reports the net profit (not gross earnings).

Understanding Revenue

Revenue is the amount of money a company earns from its business activities over a specific period, such as a quarter or a year, before deducting expenses.

Revenue Recognition Methods

There are several ways to calculate revenue, depending on the accounting method used. Accrual accounting will include credit sales as revenue for goods or services that have been delivered to customers. Under certain rules, revenue is recognized even if payment has not yet been received.

Cash accounting, on the other hand, only counts sales as revenue when payment is received. Cash paid to the company is referred to as "receipts." It is possible to have a receipt without revenue. For example, if a customer prepays for a service that has not yet been performed or goods that have not been delivered, this activity results in a receipt but not revenue.

The Financial Accounting Standards Board (FASB) has outlined the following steps to recognize revenue:

1. Identify the contract with the customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations in the contract.
5. Recognize revenue when the performance obligation is satisfied.

The statement of cash flows should be examined to evaluate a company's effectiveness in debt collection.

Revenue and Profit

Revenue is called the top line because it appears first on a company's income statement. Net income, also called the bottom line, is revenue minus expenses. There is a profit when revenue exceeds costs.

To increase profits, and therefore earnings per share (EPS) for shareholders, a company can increase revenue and/or decrease costs. Investors often look at a company's revenue and net income separately to determine the business's financial health. Net income can increase while revenue remains flat due to cost-cutting. This situation is not a good sign for a company's long-term growth.

When public companies report their quarterly earnings, the two numbers that receive the most attention are revenue and EPS. A company that beats or misses analysts' expectations for revenue and EPS can cause the stock price to be volatile.

Revenue can also be referred to as sales and is used in the price-to-sales (P/S) ratio—an alternative to the price-to-earnings (P/E) ratio that uses revenue as the denominator.

Types of Revenue

A company's revenue can be broken down by the divisions that generate the revenue. For example, Toyota Motor Corporation can classify revenue by each vehicle model. Or the company can group revenue by vehicle type (e.g., compact cars vs. trucks) or by geography.

A company can also distinguish revenue between its tangible and intangible product lines. For example, Apple might be interested in separately analyzing its physical products like iPads, Apple Watches, and iPhones, and services like Apple Music, Apple TV, or iCloud.

Revenue can also be divided into operating revenue—sales from the company's core business operations—and non-operating revenue, which is generated from auxiliary sources. Because non-operating revenue sources are often unpredictable or non-recurring, they can be referred to as one-time events or windfalls. For example, proceeds from the sale of an asset, a windfall from an investment, or money awarded through a lawsuit are non-operating revenue.

Revenue Formula and Calculation

The formula and calculation for revenue will differ between companies, industries, and sectors. A service company will have a different formula than a retailer, while a company that does not accept returns may have different calculations than those with a return period. Generally, the formula for net revenue is:

Net Revenue = (Quantity Sold  Unit Price) - Discounts - Allowances - Returns

The main component of revenue is the quantity sold times the price. For a retailer, this is the number of goods sold multiplied by the sales price.

One obvious constraint with this formula is that many companies have a diverse product line. For example, Apple might sell MacBooks, iPhones, and iPads, each with a different price point. The net revenue formula therefore needs to be calculated for each product or service, then summed for a total company revenue.

There are many components that reduce the revenue reported on a company's financial statement according to accounting guidelines. Price discounts, allowances to customers, or product returns are subtracted from the total amount earned. Note that some components (such as discounts) should only be subtracted if the unit price used in the previous part of the formula was the list price (not the discounted price).

The revenue of one entity is often the expense of another. For example, your $1,000 cost to buy the latest smartphone is $1,000 of revenue for the phone company.

Revenue Example

Microsoft has a diverse product line that contributes to multiple types of revenue. The company defines its business through various channels, including:

• Productivity and Business Processes: Office products (commercial and consumer), LinkedIn, Dynamics products
• Intelligent Cloud: Server products and cloud services
• More Personal Computing: Windows OEM, Windows commercial, Xbox, Surface

Microsoft reported $61.9 billion in revenue for the three months ending March 31, 2024. The high-level reporting requirements have Microsoft's earnings displayed between product revenue and services/other revenue.

Revenue and Income/Profit

Many entities can report both revenue and income/profit. The two terms are used to report different accumulated metrics.

Revenue is typically the total gross amount an entity earns. It's the top-line measurement of an entity's earnings from its operations. For a business, revenue is all the money that it makes.

Income/profit often includes other elements of the business. For example, net income includes expenses such as the cost of goods sold, selling, general and administrative expenses, operating expenses, depreciation, interest, taxes, and other costs. While revenue is a gross metric focused on the collection of earnings, income or profit reports the net amount earned.

Special Considerations

Government Revenue

For governments, revenue is the money received from taxes, fees, fines, intergovernmental grants or transfers, proceeds from the sale of securities, resource or mineral rights, and any other sales. Governments collect money from citizens in a region and from other government entities.

Non-Profit Revenue

A non-profit's revenue is the total amount earned. Its components include donations from individuals, organizations, and businesses, grants from governmental organizations, investments, and/or membership fees. Non-profit revenue may be earned through fundraising events or unrequested donations.

Real Estate Revenue

For real estate investments, revenue is the income generated from a property, such as rent or parking fees. When operating expenses incurred in running the property are subtracted from the property income, the remaining value is the net operating income (NOI). A property that is technically vacant does not generate any operating revenue, although the property owner may be required to report fair market value adjustments that result in gains when reporting financials externally.

What Is Revenue in Business?

Revenue is the amount of money a company earns primarily from selling its products or services to customers. There are specific accounting rules that dictate when, how, and why a company recognizes revenue. For example, a company may receive cash from a customer. Still, a company may not be able to recognize revenue until they have performed their portion of the contract obligation.

Are Revenue and Cash Flow the Same?

No. Revenue is the money a company earns from its sales of products and services. Cash flow is the total amount of money that flows into and out of the company. Revenue provides a measure of a company's sales and marketing effectiveness, while cash flow is an indicator of liquidity. Both revenue and cash flow need to be analyzed together for a comprehensive view of a company's financial health.

What Is the Difference Between Revenue and Income?

Revenue and income are sometimes used interchangeably. However, the two terms generally have different meanings. Revenue is typically used to measure the total gross revenue a company generates from its goods and services. Income is typically used to include expenses and report the net amount a company has earned.

How Is Revenue Generated and Calculated?

For many companies, revenue is generated from the sale of a product or a service. For this reason, revenue is sometimes referred to as gross sales. Revenue can also be earned from other sources. An inventor or artist may receive revenue from licensing, patents, or royalties. A real estate investor may earn revenue from rental income.

Federal and local government revenue can come from property or income tax collections. Governments may also earn revenue from the sale of assets or interest income on bonds. Charities and non-profits often receive income from donations and grants. Universities may earn revenue from tuition collections but also from investment gains on their endowment funds.

What Are Accrued Revenue and Deferred Revenue?

Accrued revenue is revenue that a company has earned from providing a good or service that has not yet been paid for by a customer. In accrual accounting, revenue is reported at the time the sales transaction takes place and may not necessarily represent the amount of cash available.

Deferred or unearned revenue can be viewed as the opposite of accrued revenue, in which unearned revenue is money paid by a customer in advance for goods or services that have not yet been provided. If a company has received prepayment for its goods, it would recognize the revenue as unearned but would not recognize the revenue on the income statement until the good or service has been provided.

Conclusion

Revenue is the amount of money an entity earns from its normal business activities, such as selling its products or services, over a specific period, such as a quarter or a year. It is the gross amount of money earned before any expenses are subtracted and is reported on the first line of the income statement.

Revenue is one of many metrics that investors look at when deciding whether to invest in a company. Growth stocks, for example, would be expected to have rapidly growing revenue, while defensive income stocks would be expected to report stable revenue. For business in general, the goal is to grow revenue while keeping the costs of production or service as low as possible.