Revenue is a crucial business term that's used in a variety of contexts to explain how much income a business is earning. However, many other similar terms are often used interchangeably and can confuse. To give you a clearer idea of how revenue works, what it means, and how it is calculated, we've created this handy guide that will help you get to grips with the topic.
What is revenue?
Put simply, revenue is income that a business receives from the sale of goods, services, or data. Revenue is recorded as having been earned the moment a good or service is delivered, not when it is paid for. This is important as it means any deductions or expenses made at a later date are not included. These could be deductions for an early payment or a refund made for a faulty product. Revenue is usually input on the first line of the income statement – hence why it’s often referred to as the “top line.”
How is revenue calculated?
Revenue involves a relatively simple calculation. This is expressed as;
Quantity x Price = Revenue
Essentially, businesses ask how many items/products/services they sold, at what price. This is a pretty simple task if you keep accurate accounting ledgers but gets more complicated when you sell an array of goods at different prices. In such a situation, you first calculate the revenue earned from each of the products and then combine the totals.
Sources of revenue
Typically, a business' revenue is earned via different goods and services. Each source is known as a "revenue stream." Those organisations that only maintain a single revenue stream may encounter difficulties if there is a sudden economic shock or a drop in demand for that particular type of good. For this reason, organisations often attempt to diversify and open up new revenue streams, limiting their exposure to economic shocks in the process.
The difference between revenue, income, profit, sales, and turnover
Revenue is often confused with a variety of other terms, some of which are synonymous and others which refer to similar but slightly different concepts. These include;
- Income – While income is often used interchangeably with revenue, the two terms don't mean the same thing in professional business terminology. In this context, income is the net total of revenues and expenses or revenue minus expenses. This is the "bottom line" on an income statement and is technically known as "net income."
- Profit – While net profit is synonymous with "net income," there are also other types of profit that can be calculated. For instance, accountants may also use "gross profit" or "operating profit," though both of these are less common.
- Sales – Sales is a form of revenue but isn't always the same as revenue. This is due to the way in which revenue can consist of income that doesn't necessarily originate from sales. Essentially, revenue is a more expansive concept than sales and encompasses a greater variety of incomes.
- Turnover – Turnover and revenue often mean the same thing and are almost synonymous. However, turnover has many other applications that don’t relate to revenue.
What types of revenue are there?
Revenue can be accumulated by various organisations, all of which earn revenue in a slightly different way. However, the two principal earners of revenue are businesses and governments. These two entities treat their revenue very differently but are very much inter-connected and dependent on one another.
Businesses earn revenue from the sale of goods, services, or data. When these sales are made to other companies, it is known as "business to business" (B2B) revenue. When they occur between a business and individual customers, it is known as "business to customer" (B2C) revenue.
The other type of organisation that earns revenue is governments. They earn revenue by taxing goods, services, incomes, and businesses to raise money to pay for public services. Her Majesty's Revenue & Customs (HMRC) are responsible for the collection of these taxes and the raising of governmental revenue.
Other types of revenue
Besides the more fundamental kind of revenue that we've already discussed, other types of revenue are used in specific circumstances to measure a business' performance in different ways. Used on its own, without, qualification, the term "revenue" is not usually used to refer to any of these types of revenue unless otherwise specified.
“Operating” and “non-operating” revenue
Operating revenue can be defined as revenue that is earned from those sales that represent the company's main line of business. For instance, a shoe retailer's operating revenue will come from the sales of its shoes. On the other hand, non-operating revenue is income earned outside of a business' main line of business. For instance, if the shoe retailer also owned a warehouse where it stored its stock, they might lease out surplus space to another business. The income earned from this lease would be non-operating revenue, as it's not directly linked to shoe sales.
Marginal revenue is used to calculate the income earned by producing one extra unit of a business’ product or service. For instance, a shoe manufacturer may manufacture ten pairs of shoes at £10. This means that each pair of shoes was manufactured for an average price of £1. However, they manufacture the 11th pair of shoes for 80p. This means the marginal revenue of the 11th pair of shoes is 80p. If they were valued by taking the average of 11 pairs of shoes, they would cost roughly 98p. Instead, marginal revenue measures incremental changes. This allows it to be used to establish when the production of additional units is no longer profitable.
Deferred revenue is earnings that have been taken in advance of delivering the product or service. It is not yet classified as revenue and is reported as a liability on financial statements. Once the revenue has been paid (i.e. the good or service has been delivered), it can be credited as normal revenue.