Revenue in accounting : definition, calculation and examples
Revenue (also called sales or turnover in english) represents the amount of sales of goods or services made by a company over a given period.
Revenue definition
The total sales of a company
Before diving into the definition of a company’s revenue, it’s important to remember that a company aims to sell physical goods or services.
Physical goods can be raw materials (wood for a lumberjack) or transformed goods (furniture for a carpenter). Service are generally intangible elements like financial consulting hours for an accountant or digital marketing services for a freelancer.
What is revenue ?
Revenue (sales) represents the sum of all sales of products or services made by a company. The period can vary, but revenue is generally assessed on a fiscal year (annually) or monthly depending on the company’s activity.
In accounting, we also talk about revenue excluding tax or including all taxes. In the case of revenue including all taxes, the amount of sales made includes the value-added tax (VAT).
Generally, this amount needs to be adjusted to get a more objective view of the revenue. Indeed, VAT is a tax that must be remitted to the Federal Tax Administration and varies by country. Moreover, as VAT rates differ between countries (8.1% VAT in Switzerland versus 20% in France), it makes more sense to compare revenue excluding VAT to avoid having revenue artificially inflated by the VAT amount.
How to calculate a company’s revenue?
Revenue is calculated by summing all the sales made by a company over a period.
For example, the monthly revenue of a medical practice corresponds to all the services performed during 1 month. Generally, it is relatively simple to find this amount by analyzing the accounting done by an accounting firm or an accountant. For this, you need to sum all the billed elements or simply take the balance of the “Sale of goods or services” account from the accounting plan for the desired period.
If this information is not available, there is a simple mathematical formula to calculate a company’s revenue : Revenue = Unit sale price x Quantity sold
What is the purpose of revenue ?
Analyzing a company’s performance
Let’s start with a simple observation : the more products or services a company sells, the higher its revenue. Therefore, revenue is a key indicator of a company’s financial performance. However, one must be wary of too quick financial analyses: a company can have high revenue and yet be losing money.
Why ? If the sum of all the company’s expenses (purchase of goods, wages, rent, other fixed and variable expenses) is higher than the amount of revenue generated, then the company is losing money. It spends more than it sells. Therefore, revenue is an indicator of performance but should not be used alone to estimate a company’s financial solidity. The number of customers, EBITDA, profit margin rate, or sales performance compared to a previous period are interesting elements to analyze.
One way to use revenue is to compare it to that of other companies in the same sector. This method, known as the comparables method, allows for a precise portrait of a company’s sales structure by comparing it with those of companies in the same sector.
Calculating forecasted revenue in a business plan
When an entrepreneur decides to start their company, they generally need to create a business plan that will help them better understand their sales and expense objectives.
Revenue is a key element of the business plan. It’s the element that every investor will analyze to understand the evolution of the company’s sales. Depending on the company’s sector, revenue can be cyclical. This can lead to significant seasonal variations when establishing the business plan. For example, a florist will see an increase in their revenue in February for Valentine’s Day. An ice cream seller will have higher sales in the summer than in the winter.
When you want to calculate your revenue in a business plan, be careful to fully understand the cyclicity of your activity. There’s nothing dramatic about having a cyclical activity as long as these cycles are clearly highlighted in your financial plan. Likewise, it’s important to quantify discounts, rebates, and refunds granted to customers to have the most accurate revenue possible.
Estimating the evolution of variable costs
The evolution of a company’s sales also allows for the prediction of the evolution of certain expenses. Variable costs are expenses that vary with the increase or decrease in activity and therefore revenue. For a baker, one of the main variable costs is flour. The more bread they sell, the more flour they will need to buy. If their revenue from bread sales doubles, it is very likely that their flour purchases will also double.
An increase in sales thus allows for anticipating the variation of a company’s variable costs. This is why accountants have developed financial ratios that help understand a company’s profitability.
The ratio called “gross margin” helps understand a company’s gross margin. Gross margin is a way to measure the amount of a company’s profits after deducting the direct costs associated with selling its goods and services. Thus, the main variable costs are subtracted from revenue to obtain an amount that is considered the gross margin. This margin then needs to be adjusted for all fixed and exceptional costs to have a clear view of the company’s profit.
What is the difference between a company’s revenue and profit ?
Difference between gross and net revenue
When creating a company, an entrepreneur must differentiate between two types of revenue: gross and net. Gross revenue represents the sum of all sales of goods and services made by the company.
Net revenue is equal to gross revenue minus invoices for which customers will probably not pay (doubtful customers) as well as the expenses related to the collection of these customers. Simply put, net revenue gives a better idea of the company’s sales by excluding sales that will probably never be collected.
Difference between revenue and profit
Revenue and profit are the two most important financial indicators for someone reading annual accounts. When your banker looks at your income statement to offer you a loan, they will necessarily look at both the revenue and the profit.
Revenue in financial statements
As we’ve reiterated throughout this article : revenue is the sum of all sales. It’s the very first line of the income statement. The one found at the top (top line) of the profit and loss account.
Profit in financial statements
Profit is what remains for the company once all expenses, fixed, variable, and exceptional, have been deducted from the revenue.
Profit is found at the bottom of the income statement (bottom line). It’s a very important element for evaluating a company’s financial health. A company can hardly sustain losses (a negative profit) for several fiscal years. As we mentioned earlier, it’s possible to have high revenue and yet incur significant losses. It all depends on the company’s cost structure.
Examples of company revenues
Revenue of Migros
Migros is one of the retail leaders in Switzerland. In 2021, Migros’ revenue was 28.9 billion CHF (approximately 34.68 billion USD). Migros’ net profit was 668 million CHF (approximately 801.6 million USD).
Revenue of Coop
In 2021, the Coop Group achieved a revenue of 31.9 billion CHF (approximately 38.28 billion USD). Coop’s net profit was 559 million CHF (approximately 670.8 million USD). It’s worth noting that the revenue related to Coop’s retail business amounted to 19.6 billion CHF (approximately 23.52 billion USD) in 2021.
Revenue of Nestlé
In 2021, the Nestlé Group achieved a revenue of 87.1 billion Swiss francs (approximately 104.52 billion USD). Nestlé Group’s net profit was 16.9 billion CHF (approximately 20.28 billion USD).
FAQ on revenue and sales in accounting
Here are some frequently asked questions about revenue that we have summarized below:
What are sales revenue in accounting ?
Revenue (sales) is the total sum of sales made by a company over a given period. It is often used to assess a company’s financial performance.
How is revenue calculated ?
Revenue is calculated by summing all the sales made by a company over a given period. This amount can be found by analyzing a company’s accounting or by using the formula: Revenue = Unit sale price x Quantity sold
What is the difference between revenue excluding tax (HT) and revenue including all taxes (TTC) ?
Revenue excluding tax (HT) does not take into account the value-added tax (VAT) while revenue including all taxes (TTC) includes VAT. It is generally more logical to compare revenues excluding tax because VAT rates vary between countries.
Why is it important to be cautious about financial analyses based solely on revenue ?
A company can have high revenue and still lose money if its costs and expenses are high. Therefore, it is important to consider other indicators such as profit or cash flow to have a complete view of a company’s financial performance.
What is the period for which revenue is generally assessed ?
Revenue is generally assessed annually or monthly depending on the company’s activity.
Can the revenue of different companies be compared ?
It is possible to compare the revenue of different companies, but it is necessary to take into account that companies may vary in size and sector of activity, so it is preferable to compare revenues using ratios like revenue per employee or revenue per production unit to have a fairer view.
Steps to calculate a company’s revenue
1. Gather the necessary information
To calculate a company’s revenue, you will need the company’s sales data for the period under consideration. These data can be found in the company’s accounts or in the accounting records.
2. Use the formula
To calculate revenue, use the following formula: Revenue = Unit sale price x Quantity sold. Apply this formula for each product or service sold by the company and sum the results to obtain the total revenue.
3. Determine revenue excluding tax or including all taxes
Revenue can be calculated excluding tax or including all taxes. To calculate revenue excluding tax, simply deduct the value-added tax (VAT) from the sales.
4. Analyze the results
Once you have calculated the revenue, you can use it to assess the company’s financial performance. It’s important to note that revenue only provides a partial picture of a company’s financial performance, so it’s important to consider other indicators such as profit or cash flow to have a complete view of the company’s financial performance.
5. Compare revenues with other companies
It is possible to compare the revenue of different companies, but it is necessary to take into account that companies may vary in size and sector of activity. Therefore, it is preferable to compare revenues using ratios such as revenue per employee or revenue per production unit for a fairer view.
Conclusion : the importance of revenue for entrepreneurs
Every entrepreneur must understand what revenue is. It’s a key element that helps understand a company’s financial health. Its calculation is simple. Revenue can be cyclical, which makes its analysis a bit more complex for certain sectors of activity.
In any case, revenue should not be analyzed in isolation. Other elements such as profit, debt, or gross operating surplus must be analyzed to have a precise view of a company’s finances. Our accounting firm can assist you in these financial analysis.
