One can’t run a business without considering revenue. It’s more than just a number on a financial statement—it’s the foundation of everything businesses do. It’s the first thing investors ask about, the lifeline for paying the team, and the starting point for planning growth.
Without a clear understanding of revenue, businesses will be flying blind. But don’t worry. Calculating revenue isn’t rocket science. Once business owners understand the basics, it becomes easier than they might think. That said, calculating revenue isn’t always as simple as it seems. The process can vary depending on the business model, whether brands sell products, services, or subscriptions.
This guide will walk you through calculating revenue step by step, providing real-world examples, and sharing tips to ensure accurate calculations. By the end, you’ll be ready to manage your business’s finances confidently.
Table of Contents
What is revenue, and why does it matter?
The basic formula for calculating revenue
Revenue calculation for different business models
4 common adjustments to revenue calculations
Key revenue metrics to track
Rounding up
What is revenue, and why does it matter?
Let’s start with the basics. Sales revenue is the total amount a business earns from selling its products or services. Think of it as the “top line,” the first figure on the income statement. It’s not the same as profit—profit is what’s left after subtracting expenses. On the other hand, revenue gives businesses a raw look at how much income they’re generating before anything else comes into play.
What is total revenue?
Total revenue covers everything a business earns from selling products or services, including money from other sources like marketing, customer success, and investments. It’s usually higher than sales revenue because it combines earnings from all revenue streams, meaning it has a slightly different calculation than sales revenue.
Why is revenue important?
Imagine planning for the business’s future without knowing how much money it’s bringing in. Impossible, right? Revenue is the starting point for almost every financial decision, from budgeting and hiring to forecasting growth. It’s also one of the key numbers investors and lenders look at when deciding whether to fund the business.
The basic formula for calculating sales revenue
For most businesses, the revenue formula is pretty straightforward:
Sales revenue = Units Sold × Average Selling Price (ASP)
Let’s break that down:
- Units sold: How many products or services the business sold during a period.
- Average Selling Price (ASP): The average price businesses sell each unit after discounts and promotions.
For example, if a fashion store sells 500 T-shirts at an average price of US$ 20 each, their revenue would be:
500 × 20 = US$ 10,000
It sounds easy, right? It can become a little more complex depending on the business model. Here’s a look at how this works for different types of businesses.
Total revenue formula
Total revenue helps businesses see how pricing affects product demand. It’s the best way to see the overall relationship between price and sales at any given time. Here’s its simple formula:
Total Revenue = Price x Quantity Sold
Revenue calculation for different business models
Every business is unique, and the way they calculate revenue can vary. Here’s how it works for some common models:
1. Product-based businesses
If the business sells physical products, its revenue comes from the number of units sold multiplied by the price per unit. This sounds simple, but remember to account for returns, refunds, and discounts.
Example:
Let’s say a phone store sells 1,200 gadgets at US$ 50 each. However, consumers returned 100 gadgets. Here’s what its revenue will look like:
Revenue = (1,200−100) × 50 = 1,100 × 50 = US$ 55,000
Note: Remember, gross revenue is the total before accounting for returns. Net revenue is what’s left after those adjustments.
2. Service-based businesses
Revenue for service businesses depends on the number of clients served or hours worked multiplied by the rate charged. The formula changes slightly here:
Revenue = Number of customers (or hours) x average price of services
Example:
A freelance designer charges US$ 100 per hour and works 150 billable hours monthly.
Revenue = 150×100 = US$ 15,000
This model can also include project-based fees, which may vary monthly.
3. E-commerce businesses
E-commerce platforms often involve discounts, returns, and promotions, which can complicate calculations. Be sure to account for these adjustments.
Example:
An online store sells 600 items at US$ 25 each, but consumers return 10%.
Revenue = 600 × 25 × (1 − 0.10) = 600 × 25 × 0.90 = US$ 13,500
4. Subscription-based businesses
Companies using subscription models can calculate their revenue based on their subscribers and the price of the fee. Here’s a good example: let’s say a streaming service averages 5,000 subscribers that pay US$ 30 monthly. The company’s monthly revenue will look like this:
Revenue = 5,000 × 30 = US$ 150,000
Another thing that makes this model special is its recurring nature. For this reason, businesses can even predict their income.
4 common adjustments to revenue calculations
Revenue rarely comes in clean and simple. Here are some common adjustments businesses often make:
- Returns and refunds: Subtract the value of any returned or refunded items to get your net revenue.
- Deferred revenue: If clients pay in advance for a service (like a yearly subscription), only count the portion corresponding to services already delivered.
- Discounts and promotions: Adjust the ASP to reflect any sales or promotions the business ran during the period.
- Currency conversion: For international sales, convert foreign revenue into the base currency using current exchange rates.
Key revenue metrics to track
Calculating revenue is just the start. To understand any business’s financial health, keep an eye on these metrics:
- Revenue growth rate: This metric shows how quickly revenue increases over time. Here’s the formula to use
Growth Rate = Current Revenue – Previous Revenue / Previous Revenue × 100
- Revenue per unit (RPU): This metric will help businesses track their average revenue per service or product sold.
- Customer lifetime value (CLV): Subscription businesses need this metric to see how much they can expect from subscribers over a lifetime.
- Revenue concentration: Businesses can use this metric to determine whether their revenue depends on specific markets or customers. If so, this is a very risky situation to avoid.
Rounding up
While calculating revenue is important, businesses must remember that not all types of revenue are equal. The most important types to understand are net and gross revenue, as mistaking the two can cost companies a lot. While gross revenue handles all earnings for sales, net revenue removes the cost of goods and focuses on what’s left. Understanding how both work and how to calculate them properly will help businesses secure their financial health and make smarter decisions which can lead to future growth.
