What Is Revenue: Definition and Calculation Explained

There are various metrics used to measure a company’s financial health and performance, and one of the most important ones is revenue. Surprisingly, this metric is often confused with other financial terms, and not many business owners know how it’s calculated.

Simply put, revenue is the money brought by a company from selling goods or services. However, there are different types of revenue and various ways to calculate it. The method you use depends on your business model and preferences.

To clear up the confusion surrounding the revenue definition and its use, we’ve created this guide. 

Here, you’ll learn what revenue is, why it is important and how it differs from other key financial metrics. We will also explain how to calculate revenue based on your business type and use the figures to improve your strategies and drive growth.

What is revenue?

The basic revenue definition in corporate finance is the total amount of money a business earns from its core operations. In other words, revenue refers to the earnings generated from selling goods оr services before subtracting costs to determine the net income. It is measured over a specific period, usually a quarter or a year.

Revenue includes the company’s regular earnings and additional income from sources like interest and equity gains accumulated during the period. 

In accounting and financial statements, revenue is often referred to as “sales” or the “top line,” because it’s the first line you’ll see at the top of your company’s income statement. Think of it as the starting point for understanding your business’ earnings before the costs.

Types of revenue

Revenue can be divided into several categories and types, depending on where the earnings come from or how it is calculated. So, let’s break it down.

Operating vs. non-operating revenue

Revenue can be broadly categorised into two types: 

• Operating revenue refers to the income generated from a business’ primary activities, such as product sales or service fees.
• Non-operating revenue comes from secondary sources like investments and asset sales. This type of revenue is often less predictable and may result from one-time events.

For example, imagine a ceramic artist who primarily earns revenue through product sales like handmade pottery. If they rent out their studio or kiln to another artisan or sell equipment they no longer use, the income generated from these activities would count as non-operating revenue.

While operating income provides insight into how well the core business is performing, non-operating revenue reflects money brought in from activities outside the business’ main operations.

Accrued and deferred revenue

Revenue can also be divided into accrued and deferred. 

Accrued revenue refers to income your business has earned from providing goods or services, even though the payment hasn’t been received yet. 

For example, if you’ve completed a project for a client but they’ll pay you next month, that’s accrued revenue. In accrual accounting, this is recorded as soon as the sale happens, regardless of when the payment arrives.

On the other side, there’s deferred revenue, which is sometimes called unearned revenue. This happens when a customer pays you in advance for goods or services that you haven’t delivered yet. 

For instance, if a customer pays upfront for a year-long subscription to your service, that payment is considered deferred revenue until you fulfill the service. In this accounting method, the earnings aren’t recognised in your financial statement as income until you’ve delivered the promised goods or services.

Subdivisions

Furthermore, many businesses choose to break down their revenue further, depending on their operations. For instance, companies offering both goods and services may track the revenue generated from goods sold separately from the money earned through services. 

Additionally, businesses that sell multiple product types or operate across different regions might categorise their revenue by product line or geographic location.

How to calculate revenue

The formula for calculating revenue varies depending on your business type and activities. There’s no strict one-size-fits-all formula because every business operates differently. This is because some companies need to take into account variables like discounts, returns or allowances offered to customers.

But don’t worry—it’s not as complicated as it sounds. Below, we’ll explain how to calculate revenue and highlight what you should consider to ensure accuracy.

Gross revenue vs. net revenue

First, we need to make sure you understand the difference between gross revenue and net revenue, two key terms every business owner should know. 

Gross revenue is the total amount of money your company makes from its business activities—before any deductions. Think of it as the raw figure that includes all your sales revenue, without accounting for returns, discounts or allowances.

On the other hand, net revenue, or net sales, is what’s left after you subtract those deductions. It’s a more accurate reflection of how much your business actually earned from its sales and services.

Both gross revenue and net revenue are not the same as profits or total income, which you get when you deduct your business expenses, including manufacturing, raw materials, salaries, rent, utilities and taxes.

Basic revenue formula

The basic gross revenue formula is simple: 

Revenue = Number of sales × Average price of product or service

For businesses that sell tangible goods, this means multiplying the units sold by the average sales price. For service-based businesses, the calculation involves multiplying the number of customers or projects by the average service cost.

Let’s look at some examples:

• In retail, revenue comes from the total sales of products sold.
• In real estate, it often includes rent and parking fees before deducting expenses like taxes, maintenance and insurance.
• For non-profit organizations, revenue may come from various sources, such as membership dues, donations, sponsorships and product or service sales. These are collectively known as gross receipts.

Once you’ve calculated your gross sales, it’s important to determine your net sales, as well. To do this, subtract any returns, discounts or allowances (if you have any) from the gross revenue during the period. 

As mentioned earlier, some businesses prefer to calculate revenue based on specific product types or individual customers. Afterwards, they can add up all calculations to get the total revenue. The method you choose depends on your business model and what makes the most sense for your operations.

The importance of revenue for your business

Revenue isn’t just a number on your financial statement. Calculating and predicting it is more than a nice-to-have skill—it’s a must for every business owner. 

Revenue is the key indicator of your company’s ability to generate income and sustain operations. It shows whether you can handle daily functions and cover operating expenses, such as paying suppliers, employees and other overhead costs. 

Moreover, tracking revenue over time helps you better understand your cash flow and profit margins. These insights are useful for assessing your company’s financial health, measuring its performance in the market and spotting trends or shifts in customer behaviour. 

Revenue vs. profit

As already covered, revenue is the money your company generates from selling goods or services. When you subtract all the costs of running your business—like operating expenses, administrative fees and taxes from that revenue, you’re left with net income.

If your net income is a positive number, congratulations—you’ve made a profit. If it’s negative, unfortunately, you’re operating at a loss.

To boost your profit, you should increase your company’s revenue and reduce expenses. For example, increasing earnings per share (EPS)—essentially generating more revenue per share of stock—can help improve profitability. 

However, relying solely on cutting costs to grow net income is often a short-term solution. While this strategy can temporarily improve your bottom line, long-term growth comes from finding ways to consistently generate revenue.

For instance, businesses like grocery stores, restaurants and e-commerce retailers often have high revenue but low profit margins. This is because they typically generate significant revenue through high sales volume, but their profits are reduced by high operating costs and competitive pricing.

Analyzing revenue to drive growth

Once you understand revenue and know how to evaluate it, you’ll find it much easier to assess your business strategies and recognise trends. 

Tracking revenue allows you to identify patterns in customer behaviour and shifts in the market landscape. This can help you spot growth opportunities, adapt to changes and address challenges before they escalate into larger issues.

You can also start comparing your revenue figures with industry benchmarks. For example, in the UK, industries often have specific revenue growth standards. These benchmarks can help you determine whether your business is keeping pace with competitors or falling behind.

Common challenges in reporting revenue

When it’s time to report your business income, you’ll quickly see how crucial accurate accounting and tracking of your earnings are. So how do you record revenue?

Accounting methods

One key concept in accounting is the revenue recognition principle, which states that revenue should be recorded when goods or services have been provided, even if you haven’t received payment yet. 

In accrual accounting, you report revenue as soon as you’ve delivered a product or service, regardless of whether the payment has arrived. In cash accounting, however, revenue is recognised only when the payment has been made.

The second method is often seen as easier by small businesses because it gives you a clear picture of exactly how much money you have in your merchant account. Still, this method doesn’t always reflect your actual financial situation. For example, you might be waiting for a large payment that will arrive soon.

Revenue reporting standards

The Financial Reporting Council (FRC) recently introduced a five-step model to help businesses, including small ones, recognise revenue properly. 

This new framework, outlined in the Financial Reporting Standard, narrows it down to the following steps:

1. Establish the contract: This could be a signed agreement with the customer, an invoice or even an email exchange that outlines the terms.
2. Identify what you’re delivering: What are you promising to give the customer? It could be a product, service or both.
3. Determine the price: How much will you earn for completing the contract? This could include the fixed price and discounts or other variables.
4. Break down the price: If you’re offering multiple products or services, allocate how much each one costs.
5. Record the revenue: Once you’ve delivered the product or service, you can officially record your earnings.

Market conditions and regulations are constantly changing, but by following these steps, you can ensure that you are reporting your revenue accurately and consistently.

If you feel overwhelmed by this process—which is completely understandable if you’ve never dealt with something like this before—you can always turn to a professional accountant or use accounting software.

Revenue and other key financial metrics

Profit is often the ultimate goal for business owners and a major motivator for investors. However, investors don’t just look at the net income when assessing a company’s financial health. Revenue is just as important and both metrics are always evaluated separately.

Why? Because revenue shows how well a company can sell its offerings, while net income reflects how it manages its expenses.

For public companies, revenue trends can signal whether a business is growing or struggling. If revenue keeps increasing, it’s a good sign the company is doing a great job. But if net income isn’t growing alongside the sales, it is a red flag. Are expenses too high? Is the company overspending?

In addition to revenue and net income, there are other financial ratios that can provide valuable insights. These include:

• Gross margin: Tells you how much of each sale is left after covering the cost of goods sold. 
• Net margin: Shows how much of your revenue actually turns into profit. 
• Operating margin: Shows how much profit you’re making from your core operations before taxes and other costs.
• Return on assets (ROA): Measures how efficiently your business is using its assets to generate profit – this metric is very important for investors.
• Revenue per employee: Indicates whether your workforce is being used effectively.

Whether you’re a public company or a small business, tracking these metrics will give you a clear picture of your business’ performance and allow you to benchmark your results against others in your industry.

Revenue strategies for UK businesses

Every business aims to achieve stable and consistent profits—and ideally, to increase them. However, boosting your bottom line revenue isn’t just about cutting costs. It requires thoughtful strategies.

Maximising revenue

To maximise revenue, you should focus on two key areas: increasing the sales volume and implementing the right pricing strategy.

To drive more sales, you need to know how to attract new customers and retain existing ones. This is achievable through high product quality, excellent customer service and fostering strong relationships within your community.

You can use business data to better understand customer behavior, shopping patterns, and the market landscape. Based on these insights, you can adjust your offerings and refine your marketing strategies.

Another effective approach is to diversify your revenue streams by introducing new products or services. This way you can appeal to a broader audience, increase brand visibility and even tap into areas of the market that are currently underserved. 

Aligning with your business model

The way you receive revenue depends heavily on your business model. Understanding this is crucial for implementing effective strategies.

For example, subscription-based services rely on consistent, recurring payments. This means focusing on customer retention and ensuring the ongoing value of your product.

On the other hand, freemium business models generate revenue by converting free users into paying customers. This requires a strong focus on upselling and delivering premium value.
These differences highlight that the approach you use should always align with your specific business model. Tailoring your goals and strategies to your unique situation is key to boosting revenue.

Key takeaways

Revenue shows how much your business earns from selling goods or services before operating expenses and taxes are deducted. It is one of the most important figures for a company and also a key metric for investors.

Knowing how to calculate revenue and use the figures to refine your strategies is crucial for any business owner. While the basic revenue formula is units sold times the average price, many factors can impact how you choose to measure and record your earnings. 

In this blog post, we’ve provided a clear revenue definition, explained the different types and covered other essential financial terms, highlighting the key differences between them. We also discussed how to calculate revenue based on your business model and what strategies you can implement to boost growth.

Frequently Asked Questions

What is the difference between gross income and revenue?

Revenue refers to the total amount of money a business earns from selling goods or services before any expenses are deducted. Gross income, on the other hand, refers to the amount of money a business makes after subtracting the cost of goods sold from its revenue. These costs include expenses directly related to the production, such as materials and labour.

Do you pay tax on profit or revenue?

Every business pays tax on its profit, not on revenue. For example, if your business earns £50,000 in revenue but your operating costs total £30,000, your profit will be £20,000. Taxes will then be calculated on the £20,000 profit.

How can revenue be negative?

Negative revenue is a rare case and usually indicates poor financial health, but it can happen. To calculate your final revenue figures (net revenue), you need to deduct any discounts, returns and allowances from the given period. If these deductions exceed your generated earnings, you’ll end up with negative revenue. For example, you may have more product returns or rebates in a month than actual sales.