How to Calculate Total Revenue for Your Small Business
May 18, 2023
A lot goes into determining your company's financial health. Still, knowing your total revenue—how much money you make from selling your products and services—is an excellent starting point.
So, why is total revenue important to your business and how do you calculate it? We’ll cover all that and more, so let’s dive in!
What Is Total Revenue?
Total revenue—also called gross revenue, total sales, or sales revenue—is the amount of money your business generates from selling its services or products during an accounting period.
For example, if you own a restaurant, your revenue will come from selling food, drinks, and merchandise.
The total revenue is the first section you'll see on your income statement. It shows all the cash your business brought in during an accounting period.
When calculating the total revenue, it’s important to note that your business can generate income from two major sources: operating activities and non-operating activities.
Operating revenue is the revenue you make from selling your products and services (the main line of your business). For example, if you’re a restaurant business owner, the food and drinks you sell make up your operating revenue since they’re your primary income sources.
Non-operating revenue is the revenue you generate from activities not related to your core business operations. For instance, the cash you generate from selling some of your restaurant’s kitchen equipment would be non-operating revenue since it’s a one-off sale and inconsistent.
You only use operating revenue when calculating total revenue since non-operating revenue is irregular.
Now that we’ve answered this burning question, let’s take a closer look at why total revenue is important.
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Why Is Total Revenue Important for Your Business?
Total revenue is crucial since it shows how in-demand your product is. If you have high revenues, that means customers want to buy your product and, chances are, you have a strong share of the market.
That’s a great place to be in if you’re thinking about growing your business. You may be able to take some risks—and re-invest some of that hard-earned money into new equipment, employees or other critical functions—all the while knowing you have revenue coming in.
If your revenue isn’t where you want it to be—then it’s a clear metric to set a goal for.
“Total revenue is hugely important as it is the simplest way to measure your progress towards the goals you've set.”
You can also use your sales revenue to make pricing decisions. If your business costs are higher than your sales revenue—you definitely will be losing money. So, you can either increase prices or reduce expenses to make more money.
Also, if you want to sell your business, total revenue could play a massive role in the sale price, depending on the potential buyer.
While profits have the most significant influence on how much you could sell it for, your revenues may be of more interest than profits to potential buyers if they’re focused on increasing market share over everything else.
How Do You Calculate Total Revenue?
Calculating the total revenue of your business is pretty straightforward. You just multiply the total amount of units sold by the price of those items.
Here’s the total revenue formula:
Total Revenue = Quantity Sold x Price Per Unit
For example, let’s say your restaurant’s total sales for the week comes from selling the following:
The total revenue would be:
Total Revenue = (500 x $2.50) + (1,000 x $1)
Total Revenue= $1,250 + $1,000 = $2,250
Your total sales would be $2,250 for that week.
How Do You Increase Your Total Revenue?
Increasing your revenue is a sign of good financial health for your business. After all, your business must bring in money to make a profit.
With that in mind, here’s how you can boost your company’s revenue:
Adjust your prices based on your revenue goals and market situation. But remember that the price increase will only boost revenues and profits if it doesn’t hurt sales.
Bundle services or products that don't normally get bought with more popular items. For example, your restaurant could bundle a popular side dish with an entree instead of your customers buying the items individually.
Analyze the buying patterns of your customers and the products they prefer. Then, tailor your marketing based on their preferences.
How Does Total Revenue Compare with Other Types of Revenue?
Let’s see how total revenue relates with other types of revenue.
Total Revenue vs. Net Revenue
Total revenue is your income before deducting the Cost of Goods Sold, sales returns, allowances, or discounts. On the other hand, net revenue is your income after factoring in those selling-related expenses.
Here’s the net revenue formula:
Net Revenue = Total Revenue – Sales Returns – Allowances – Discounts
Sales Returns are any refunded returns.
Allowances are price reductions for damaged or defective products.
Discounts are rewards you give to customers when they meet certain conditions.
For example, let's assume the total monthly income of your fast-food restaurant comes from:
Now, you had a sale and got some returns in. That looked like:
400 of the 2,000 burgers were sold at a discount of 20%
Returns added up to $500
So, how do you determine your monthly net revenue?
First, calculate the total sales without any discounts or returns included:
Total Sales = (2,000 x $2.50) + (2,000 x $1) + (100 x $30)
Total Sales = $5,000 + $2,000 + $3,000 = $10,000
Next, calculate the discount you gave to customers on Black Friday:
Discount = (20% x $2.50) x 400
Discount = $0.50 x 400 = $200
Finally, subtract the discounts and sales returns from your total sales to find the net revenue:
Net Revenue = $10,000 – $200 – $500 = $9,300
Your restaurant’s net revenue for the month would be $9,300.
What’s the Difference Between Net Income and Net Revenue?
Net income (or net profit) is your company's income after deducting all operating expenses and accounting for losses, gains, taxes, and other costs. On the other hand, net revenue refers to your total income after deducting only selling-related expenses.
You'll find net revenue on the top line of your financial statement. After deducting all expenses, taxes, interest, and other costs, you'll see the net income at the bottom line.
Total Revenue vs. Marginal Revenue
Marginal revenue shows how revenue grows with each additional sale. So, you must know the total number of units sold for a reporting period before calculating the marginal revenue.
Here’s the marginal revenue formula:
Marginal Revenue = Change in Total Revenue / Change in Number of Goods Sold
For example, let's say your restaurant was making 200 pizzas and selling them at $20 each, generating $4,000.
Due to customer demand, you decide to lower the price of each pizza to $18. As a result, more customers buy your pizzas and you end up selling 250 pizzas, generating $4,500 in revenue.
In other words:
Before customer demand
After customer demand
The additional revenue you’ll generate from selling the pizzas will be:
That means, you’ll make an extra $10 for every pizza you sell.
If your marginal revenue is more than what it costs to make one extra pizza, then you’ll be making money. Your gross revenue will go up.
For example, let’s assume the total cost of producing an extra pizza is $8. Since your marginal revenue is $10, your gross revenue will eventually increase.
However, producing more pizzas won't make sense if the cost of producing an extra pizza is higher than the marginal revenue (say, $12).
You can use Hourly’s payroll platform to simplify the process of calculating your marginal revenue. It lets you view your labor costs in real-time, helping you do more accurate calculations.
Total Revenue vs. Annual Revenue
Total revenue is calculated for a period of time (which may be quarterly or monthly) and annual revenue is always calculated for a 12-month period.
Here’s the annual revenue formula:
Annual Revenue = Sales Price x Number of Items Sold in a Year
For example, let’s say you sell pizzas at $15 each. If you sell the pizzas to 10,000 customers in one year, the annual revenue for the pizzas will be:
Annual Revenue = $15 x 10,000 = $150,000
If you also sell pizzas with custom-made boxes for $20 to 1,000 customers in the same year, your annual revenue for those pizzas will be:
Annual Revenue = $20 x 1,000 = $20,000
As such, your total annual revenue is:
Total Annual Revenue = $150,000 + $20,000 = $170,000
Total Revenue vs. Deferred Revenue
Deferred revenue is cash you haven't earned yet. For example, you could receive an advance payment from a customer for products or services you'll deliver later.
Because you have yet to deliver the goods or services, you haven’t earned that cash—you still owe those products or services to the customer. You can only put it on the income statement once you've delivered it.
For that reason, deferred revenue is a liability on the balance sheet. If you cannot deliver the products or services or the client cancels the order, you'll have to repay the client unless otherwise agreed in a signed contract.
Keep an Eye on your Total Revenue, but Don’t Forget Profit Either
Total revenue is a critical metric for any business. It tells you how much you’re bringing in from your sales, and gives you an indicator of how in-demand your product or service is.
But remember, the reason you're in business is to make a profit, right? If you do, you'll stay in business. On the flip side, you’ll eventually go out of business if you have a high revenue with no profit. That can happen when a business has high operating costs (i.e., isn’t efficient), and it’s definitely something to watch out for.
Now that you know everything there is to know about total revenue, what’s left to do? Find ways to increase your profit even if your revenue stays the same.
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