Net revenue is a critical measure for businesses to compute and monitor. Net revenue should be tracked since it can provide firms with better knowledge of their profit margins and financial performance. In this article, we will define net revenue, the net revenue formula, gross revenue vs net revenue and some of the advantages of calculating or estimating net revenue for businesses.
What is Net Revenue?
Net revenue, commonly known as the “top line,” is the total sales of a corporation minus the cost of products sold. It is a financial performance statistic used by firms to track their financial success.
What is Gross Revenue?
Gross revenue, sometimes referred to as total revenue or gross income, is the total amount of money made through the sale of goods or services over a given period, such as a quarter or a year. It is frequently used to show your company’s potential to sell items and generate revenue, but it does not take into account expenses.
Profit vs Net Revenue
It is critical to understand that net revenue is not the same as profit. Profit is the amount of money left over after all expenses have been paid. Net revenue solely considers the cost of goods sold and excludes additional expenses like rent, salaries, and advertising.
Net Revenue Formula
Net revenue for a given time can be calculated using the formula
net revenue = gross revenue – returns – allowances.
Returns are the monetary worth of all returned items, whereas allowances are the total amount of the discounts granted on gross sales.
How To Use The Net Revenue Formula
The net revenue is determined by the gross revenue, which you must know before using the calculation. To calculate net revenue using the formula, use the steps below as a guide:
#1. Determine the Gross Revenue
You must first determine the gross revenue to calculate the net revenue. For the time being, add up all sales transactions during the period, ignoring any refunds or purchase discounts. This is the amount required to deduct sales-related expenses. Assume that a company’s gross revenue for a particular quarter is £138,500. Even if the corporation gives out a total of £5,560 in item discounts, the gross income is unaffected.
#2. Take Away Any Product or Service Discounts
Subtract any product or service discounts from the overall income. Using the preceding example, the corporation now subtracts the total discounts of £5,560 from its total quarterly revenue of £138,500 to arrive at £132,940. However, this is not yet net revenue. Returns and commissions must still be accounted for.
#3. Deduct Any Returns or Refunds
Subtract the entire amount in returns or refunds from the difference between the gross revenue and the subtracted discounts. In the same example, the corporation subtracts the £132,918 difference from the previous stage from the total amount in returns issued for the fiscal period. If the corporation issued £9,142 in returns, the total amount would be £123,776.
#4. Deduct Employee Commissions
Following that is any commission-based pay for employees. The same company determines the difference between £123,776 from the previous stage and the amount it pays in commissions, resulting in a difference of £111,478 assuming the company pays a total of £12,298 in sales commissions to its employees. This is the net revenue of the company.
#5. The Difference Represents Net Revenue
The net revenue is the result of deducting the remaining operating expenses, such as the cost of products sold, overhead, non-commissioned staff pay, company obligations, and taxes. Profit is calculated by deducting these costs from net revenue.
Examples of How to Use the Net Revenue Formula
For further information on how corporations and organisations use the net revenue formula in their income statements, see the examples below:
#1. Grocery Shop
A grocery shop chain is another wonderful illustration of the net revenue formula in action. Throughout a fiscal year, large grocery chains typically track and record sales data. Assume a supermarket assesses its gross revenue for the year at £6,900,00. The grocer’s accountant then computes item discounts and returns, refunded products, and store demonstrators’ commissions on customer sales
- Item reductions totalled £310,000
- Product returns and refunds totalled £166,00
- Employee commission totalled £131,000
With this information, the accountant can use the formula to compute net revenue. The grocer’s net revenue is £6,293,000 after deducting discounts, refunds, and commissions. After that, the accountant deducts overhead, cost of goods sold, operational expenditures, and corporate taxes.
The Benefits of Determining Net Revenue For a Business
Companies can analyze any costs associated with selling products and services by calculating net revenue. Gross revenue measures a company’s ability to conduct business and grow, whereas net revenue is more important because it focuses on the careful management of sales and marketing costs. The following are some advantages to focusing on net revenue value:
#1. Data is Provided to Analyze Expansion Plans
When expanding operations to include more locations or new products and services, factors such as target markets, capability, cash flow, and competition must be considered, companies may also consider net revenue when deciding whether to expand. For example, while increasing operations may result in more gross revenue, it may also necessitate greater discounting and increases to sales employees’ commissions to meet sales targets, resulting in lower net revenue overall.
#2. Investors are Given Information
Understanding a company’s net revenue informs potential and current investors about its financial health. Investors want to know a company’s expenses to determine true profitability. Because gross revenue does not take into account any expenses, investors may find net revenue more useful when making an investment decision.
#3. Maintaining the Accuracy of Expense Classifications
Net revenue is important because, in an income statement, companies account for discounts, refunds, and commissions before profits and overhead. Sales costs are thus accurately classified as part of the net revenue calculation rather than as indirect expenses. Understanding expense classifications enables businesses to operate and adhere to accounting principles.
#4. The Emphasis is on Sales and Marketing Performance
Because it does not account for refunds, discounts, or commissions used to incentivize and increase sales, gross revenue is higher than net revenue. Net revenue accounts for all costs associated with sales activities, which aids in determining sales and marketing performance as well as resource allocation. The success of pricing strategies, refund policies, and sales commission rates is indicated by net revenue results.
Differences Between Gross and Net Revenue
When comparing gross revenue vs net revenue, it’s important to understand the differences between them.
| Gross Revenue | Net revenue | |
| Reported on | Income statement | Balance sheet |
| Volatility | More volatile | More stable |
| Measures | Sales performance | Profitability |
| Calculated on | Accrual basis | Cash or accrual basis |
| Operating expenses | Is Affected | Not affected |
How Gross and Net Revenue Affect Finances
When considering gross revenue vs net revenue, it’s important to note that the two measures show different aspects of a company’s financial health. Both sources of revenue are used by potential lenders and investors to learn about your business strategy and management.
Gross revenue is a measure of your ability to sell a product. Net revenue, on the other hand, shows how much of your gross sales remain after accounting returns, refunds, and discounts.
When your net revenue is close to your gross revenue, it may indicate that your product is popular enough for people to keep buying it. It also states that you do not need to provide huge discounts to move things.
Gross revenue may be used by investors to validate your business model and product offering. They can, however, compare it to net revenue to learn more about product quality and the efficiency of your marketing and sales methods.
While price reductions can be an efficient strategy to attract new consumers and broaden your target market, you should be conscious of the impact they have on your company’s earnings. Comparing gross revenue vs net revenue might help you strike a balance between aggressive growth tactics and long-term business plans.
Management of Net Revenue
As a result, Net Revenue Management is concerned with the management of sales and profits. This term is relatively new and refers to a data-driven approach. Making decisions based on shopper data is part of net revenue management. This is done to increase sales and profit by improving product performance.
To manage your net revenues, it is best to optimize your prices and trade spending. As a result, you must devise a strategy that will assist you in achieving the desired net revenue statistics.
Increased sales equal increased earnings. If you optimize your sales, you will be a more efficient firm. If you invest in net revenue management, you will also become more profitable. Companies have attempted this since the dawn of time.
The NRM viewpoint stresses the use of data to make a business smarter. They’re all doing something, whether it’s changing pricing like an airline or a motel or focusing on specials like a supermarket supplier. The question is not whether to utilize NRM but rather which approaches to employ and then focus on getting more done with less.
What is The Process of Net Revenue Management?
In its most basic form, NRM is about making decisions based on facts. This isn’t a novel concept. NRM is similar to category management in that it is fully data-driven. Category management was designed to make use of data. NRM most emphatically does. It’s all about being more strategic to increase sales and profits.
For a standard firm, you may get into NRM by analyzing how much the company spends on promotions each year and then calculating your returns from suppliers and customers. When you know your total spending ahead of time, it is much easier to make the required adjustments in your expenses to maximize your net revenues.
Is Net Revenue a KPI?
The Net Profit Margin KPI measures how effective your business is at generating profit on each dollar of revenue you bring in. This financial KPI is a measure of the profitability of your business and is instrumental in making long- and short-term financial decisions.
What is Net Revenue Metric?
Also referred to as net dollar retention (NDR), Net Revenue Retention (NRR) is a SaaS business metric that calculates the percentage of revenue retained from existing customers over a specific period (usually monthly or yearly), including upgrades, downgrades, cross-sells, and cancellations.
What Are The Components of Net Revenue?
Net revenue is a company’s sales from which returns, discounts, and other items are subtracted. In accounting, net refers to adjustments made to the original. Therefore, it can be calculated after adjusting gross revenue with discounts, returned products, or other direct selling expenses.
Is Net Revenue Equal To Sales?
Net sales, or net revenue, is your total sales revenue minus a few things: returns, sales allowances and sales discounts.
Is Revenue Synonymous with Turnover?
Revenue is the amount of money that a company earns from selling products or services for a fee, whereas turnover is the number of times a company makes or burns assets. In reality, turnover has an impact on company efficiency, whereas revenue has an impact on profitability.
Conclusion
It’s crucial to understand the distinction between gross revenue vs net revenue, as it can impact a company’s decision-making process. You already know that the income you make from a sale is gross revenue, but net revenue is what you get after deducting all kinds of expenses.
Net revenue is a crucial topic since it helps you understand your profit structure and how much money you make at the end of the day. However, this does not diminish the importance of gross revenue, as both notions are equally essential.
You must use caution when computing net revenue since many deductions must be made. Net revenue is the most essential metric for all financial variables. It is the one who anticipates finding where earnings are high and low, determining which portions need to be eliminated and which parts need to be grown, and making a strategic decision on what to do to boost profits.
Related Articles
- 10 Biggest Insurance Companies by Revenue, Net Income and Market Cap in 2023
- What Is Net Income? Meaning, Formula & How to Calculate
- Revenue vs. Turnover: Key Differences 2023
- Revenue vs. Profit: Differences & All You Need to Know
- How To Calculate Revenue: A Complete Guide
Reference
