The ultimate motive of every business is to reap benefits in monetary form by performing certain primary business operations like selling the offering, investments, etc. This monetary benefit is referred to as revenue and is essential for the business to keep it going in the long run.
But what is revenue and what are its components? Let’s find out.
What is Revenue?
Revenue is the total earnings generated by a business through its primary operations like the sale of offerings, interests, rents, etc., less any returns or discounts.
For example, a chocolate seller will generate revenue through the sale of chocolates, a hairdresser will earn revenue by selling their services, and a bank will generate its revenue in the form of interest on the loans to borrowers.
Revenue does not include income in the form of interests on investments, capital gains, sale of assets or other miscellaneous earnings which are not from the primary operations of the business.
It can be classified into gross revenue and net revenue.
What is Gross Revenue?
The term revenue without any prefix refers to the gross revenue of the business. Gross revenue is the revenue earned before subtracting the costs and expenses incurred to earn it (directly related selling expense). These costs and expenses include overhead, commissions, cost of production, taxes, wages, freight, etc.
What is Net Revenue?
Net revenue is the revenue earned after subtracting the costs and expenses incurred to earn it (directly related selling expense). These costs and expenses include overhead, commissions, cost of production, taxes, wages, freight, etc.
Net revenue = gross revenue – directly related selling expenses.
What is a Revenue Model?
A revenue model is a conceptual structure that states and explains the revenue earning strategy of the business.
Revenue vs Income
Even though many use revenue and income interchangeably in the business world, there is a big difference between the two. Income refers to earnings from all the sources combined. Revenue is a subset of income which includes earnings only from the primary operations of the business.
While revenue includes earning generated only through the sale of goods and/or services associated with the company’s primary operations, income also includes earning from other operations like
- Interest on investments,
- Sale of assets, etc.
Revenue vs Sales
Sales are a subset of revenue and can be defined as the economic price paid by the customers for a product or service offered by the business. While sales are a source of revenue, a company may include other revenue sources like interest on loans, rent on the property, etc. as well.
Revenue is the money generated by the business through its primary operations which usually include sales but isn’t limited just to sales. Sales usually are less than or equal to the revenue but in cases where there are returns and discounts involved, the sales can be more than the actual revenue earned.
Revenue vs Profit
Revenue is the top line of the income statement whereas the profit is the bottom line. While revenue includes the gross earning from primary operations (without any deductions), profit is the resultant income after accounting for expenses, expenditures, taxes and additional income and costs in the revenue.
Profit = Revenue + Other income – Total expenses
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A startup consultant, dreamer, traveller, and philomath. Aashish has worked with over a 50 startups and successfully helped them ideate, raise money, and succeed. When not working, he can be found hiking, camping, and stargazing.