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Earning sales revenue is the reason you’re in business. Sales revenue is the money your business receives from your customers for goods and services sold.
Revenue from sales should be calculated for each accounting period, with a monthly calculation being best, although smaller companies may find it sufficient to calculate sales revenue quarterly or even yearly.
Overview: What is sales revenue?
Sales revenue is the money received from selling goods and services. Perhaps the most important business metric, sales revenue ultimately determines whether you remain in business or are forced to close.
Sales revenue is calculated differently for a business that primarily produces and/or sells products versus a service business.
For instance, if you manufacture or sell items, you would first calculate the number of products sold, then multiply it by the average cost of the products that you sell. So if you sell 700 pairs of shoes in May, and the average cost of the shoes you sell is $75, your revenue formula would be:
700 × $75 = $52,500
The result indicates that your sales revenue for the month May is $52,500.
For those with a service business, sales revenue is arrived at by multiplying the number of customers by the average service price.
For instance, if your tax preparation business prepares returns for 240 customers in May, with an average service cost of $125, you would use the following calculation to determine monthly sales revenue:
240 × $125 = $30,000
The results of the calculation indicate that your sales revenue for May was $30,000.
While it’s possible to calculate sales revenue manually in separate ledgers or by using spreadsheet software, this can be time consuming. Manually recording sales revenue also increases the possibility of errors, which will result in inaccurate financial statements.
The best way to ensure that your revenue is calculated and recorded accurately is by using accounting software in your business.
When calculating your revenue totals for the period, it’s important to remember that there are two types of sales revenue:
- Gross sales revenue: Gross sales revenue represents the amount of money that your business receives from customers without including deductions for cost of goods sold, discounts, allowances, or returns. If you sell a rocking chair for $150, your gross sales revenue would be $150.
- Net sales revenue: Net sales revenue is your total sales amount after the cost of goods sold as well as discounts, allowances, and returns have been deducted from the gross revenue amount. If your cost of goods sold for one rocking chair is $47, then your net sales revenue for selling the $150 chair would be $103. Net sales reflects your sales profits and presents a more accurate picture of your sales totals.
Sales vs. revenue: What’s the difference?
The difference between sales and revenue is that sales is a part of revenue, but not necessarily the only source of revenue. Sales is the revenue that is earned from primary business operations, which is the sale of goods and services.
Many businesses use the terms sales and revenue interchangeably, and for smaller businesses, there is likely no difference between the two.
However, for larger companies with more revenue sources, sales is considered only one source of revenue, particularly for businesses that have multiple investments and sources of revenue besides sales.
Let’s look at an example. Christine owns a small hat shop that is currently housed in a building Christine owns. There is a similar storefront in the same building that Christine is currently renting out to another business for $1,100 a month.
Chrstine’s sales for June totaled $5,350. She also earned revenue in the amount of $1,100 from the rent paid to her by the owner of the shop next door. Christine’s total gross revenue for the month was $6,450, but her gross sales revenue was $5,350.
The following is an example of how Christine’s various types of revenue appear on her income statement:
Hats by Christine
Income Statement (partial)
Total gross revenue
How to calculate sales revenue for your small business
If you use accounting software, the task of calculating sales revenue is completed for you. However, if you’re manually tracking revenue using spreadsheets or manual ledgers, there is a way to calculate both product-based and service-based sales revenue.
Product-based sales revenue
To calculate product-based sales revenue, you’ll need to add up the number of products sold and then calculate the average price of the products that you sell in order to determine your average sales price.
For example, Tom owns a small online store that sells used books. He currently prices his books in three tiers:
- Tier 1: $7.50
- Tier 2: $5.00
- Tier 3: $3.00
To get his average sales price, Tom adds up the total and divides it by 3:
$15.50 ÷ 3 = $5.17
Based on this calculation, Tom’s average sales price is $5.17 for each book.
In the month of June, Tom sold 748 books. To calculate his revenue for the month, he’ll do the following calculation:
748 × $5.17 = $3,867.16
Tom’s gross sales revenue for the month was $3,867.16. However, Tom needs to factor in the cost of purchasing the books he sold, which was $425.
$3,867.16 − $425 = $3,442.18
According to the calculation above, Tom’s net sales revenue for June was $3,442.18.
Service-based sales revenue
Instead of using the number of services sold, service-based revenue is calculated based on the number of customers served multiplied by the average service cost. For example, Jim runs a small carpet cleaning business. He offers five different services:
- Service 1: $29.95
- Service 2: $34.95
- Service 3: $39.95
- Service 4: $44.95
- Service 5: $49.95
In order to find the average service price, Jim will add up his services, which totals $199.75 and divide that by 5:
$199.75 ÷ 5 = $39.95
According to Jim’s records, he had 114 customers in June. To determine his gross sales revenue for the month, he would use the following formula:
114 × $39.95 = $4,554.30
Jim had to purchase supplies for his business, such as cleaner, and he also had to replace one of his machines in June, with cost of services totaling $1,257. Jim will need to subtract that total from his gross sales revenue to arrive at his net sales revenue for the month.
$4,554.30 − $1,257 = $3,297.30
Sales and revenue are not the same
Sales revenue is the money received from your customers for the sale of goods or services. For smaller businesses, this may be your one source of revenue, but many other businesses have sales revenue as well as other revenue sources that need to be considered when calculating the total revenue for your business.
If you’re struggling to calculate sales revenue for your business, you should consider using accounting software to automate the entire process, particularly if your business is growing. Sales revenue is the driving factor behind the success (or failure) of your business. Be sure you’re managing it properly.
View more information: https://www.fool.com/the-blueprint/sales-revenue/