Revenue Meaning, Types and Formula Explained

What is revenue?

While the term seems self-explanatory, the question ‘what is revenue’ deserves deeper introspection. By its simplest definition, revenue is what a company earns from its business activities over a period of time (such as a quarter or fiscal). For many businesses, revenue means earnings from the sale of goods and services – the reason why revenue is often called gross sales amount.

However, not all businesses sell goods and services. Apart from the sales, some other revenue sources include:

• Fees and service charges
• Income from rent
• Subscription fees
• Advertising fees
• Licensing fees
• Patents
• Royalties.

Revenue is not to be confused with income. Revenue is a company’s total income without subtracting any expenses (more on this later).

Why is revenue important?

Understanding revenue and keeping revenue records helps companies understand their current financial health and predict future growth. Perhaps indicative of its importance in business, revenue is the first item on a company’s income statement, which is why it is called the ‘top line’.

Analysing revenue data helps companies develop better pricing strategies, create effective budgets and sales campaigns, and set long-term and short-term goals.

Revenue is also correlated to stock price, and investors and analysts closely monitor revenue on financial statements. When a company’s revenue beats analysts’ expectations, it leads to a jump in the stock price. Similarly, a lower-than-expected revenue figure can prompt a drop in stock price.

How to calculate revenue?

To calculate revenue, you can use this simple revenue formula:

Revenue = Number of units sold x Price per unit

For companies that provide services instead of goods, the revenue formula can be interpreted as:

Revenue = Number of customers x Average price of services

Companies may face complications on how to calculate revenue if they have a diverse product line – for example, a firm dealing in smartphones, computers, laptops, wearable devices, and accessories. In such a case, the correct practice is to calculate the revenue for each product separately, then add up the figures to arrive at the gross revenue.

Types of revenue

Accrued revenue

Accrued revenue is income a company earns for providing goods or services for which it has not yet been paid. For example, the company has delivered a product or provided a service but is yet to bill the customer. Accrued revenue, therefore, means earnings that have been recognised but not realised. Think of an accountant who files a client’s tax returns for an agreed upon sum, which will be paid later. While accrued revenue doesn’t give a clear picture of the current cash flow situation, it is still an important figure because it helps businesses understand their long-term financial performance.

Deferred revenue

On the opposite spectrum of accrued revenue is deferred revenue, which is income earned before the delivery of goods/services. The customer pays in advance on the understanding that they will receive the goods/services at a later date. This is why deferred revenue is also called unearned revenue. An example of unearned revenue is when an e-commerce retailer receives online payment for a product it is yet to ship.

Operating revenue

Operating revenue is what a business earns from its core activities – a hospital from the provision of medical services, a retailer from the sale of goods, etc. revenue is the largest source of a company’s income and profits. Sales revenue and service revenue are prime examples of operating revenue.

Non-operating revenue

In contrast, non-operating revenue is income earned from activities outside of a business’ core activities – such as a consultancy firm’s earnings from renting out space in its premises. Interest earned on investments is another example. Unlike operating revenue, non-operating revenue is less regular. In fact, it might even be one-time, such as earnings from winning a lawsuit.

Gross revenue

Gross revenue simply means total revenue earned by a business for a given period, without any expenses deducted.  

Net revenue

Net revenue is what you get when you deduct purchase expenses from gross revenue. Purchase expenses include discounts, allowances (for example, an additional discount for buyers who pay their credit bills earlier), commissions (offered to sales representatives), and items returned. The formula to calculate net revenue is:

Net revenue = (Number of units sold x Price per unit) - Discounts - Allowances - Returns

Marginal revenue

Marginal revenue is what a company earns from selling an extra unit. Marginal revenue goes hand in hand with marginal cost, which is the expense of producing that extra unit. It is logical for companies to increase production output only as long as marginal revenue equals marginal cost. If marginal cost overtakes marginal revenue, it means producing those extra units is no longer viable. Marginal revenue is helpful in more than one way. Compiling and analysing marginal revenue data can help business owners set effective product prices, gauge customer demand, and determine future production levels.

Recurring revenue

Recurring revenue is the opposite of revenue earned from a one-time sale. It is a company can expect to earn at regular intervals. Monthly payments based on long-term contracts, such as a streaming service subscription or mobile phone plan, are examples of recurring revenue. Recurring revenue is a highly desirable revenue model because it stands for predictability and stability.

Revenue recognition methods in accounting

1. Accrual accounting

Revenue is accounted for at the point a product or service is delivered. This means payment for the product/service is recognised as revenue even before it has been received (remember accrued revenue?). The accrual accounting principle states that revenue must be recognised and recorded in financial statements at the time it is earned rather than when payment is made.

Accrual accounting informs you not only of past transactions but also of cash resources you will be receiving in the future. By presenting an accurate cash flow picture, it helps companies achieve operational efficiency. Accrual accounting is a key principle on which the Singapore Financial Reporting Standards are built. 

Cash basis accounting

In contrast, the cash basis accounting method accounts for revenue only after it has been paid by the customer and received by the company. The focus is not on when revenue is earned but on when it is received. Cash basis accounting is simpler than accrual accounting. Its biggest advantage is that it tells companies exactly how much cash they have on hand. It is considered especially suitable for small businesses without a lot of inventory. However, cash basis accounting can be misleading at times – for example, a large cash inflow due to multiple customers paying up at the same time might paint a false picture of financial health when in fact the business is going through a period of low sales.

Examples of revenue

Today, more and more businesses earn their dollars from multiple revenue streams rather than from a single stream. If a company only sells cars, it has a single revenue stream. But if it also sells car parts and accessories, rents its cars out by the hour, and provides advertising space on its vehicles, the company has multiple revenue streams.

Here’s an example of a hotel earning from multiple streams for a quarter:

However, apart from sales revenue and service revenue, there are many other revenue models, such as:

• Real estate revenue: Income from renting out or leasing property and charging parking fees are examples of real estate revenue.
• Subscription revenue: The SaaS subscription revenue model has seen remarkable growth in recent years. Think streaming services, business communication platforms, writing tools, and e-commerce platforms. Subscriptions are considered a highly profitable revenue model as customers pay recurring fees every month, quarter, or year.
• Licensing revenue: Licensing revenue is what companies earn by allowing other companies to use copyrighted and trademarked products/material  such as a music firm that grants a movie production company the licence to use a specific song, or a software company that sells licences for its products. Licences are usually a one-time buy and the companies that sell them receive a large amount upfront, making this yet another popular revenue model.
• Advertising revenue: Every business needs marketing to reach buyers and create awareness about products. Businesses can earn revenue from advertising in multiple ways. For example, a real estate company can sell space on its buildings for hoardings while an online business with high website traffic can offer digital ad space.

Know the difference

Revenue is often used interchangeably with other terms, especially income. It’s important to know the differences:

Revenue vs income/profit

The terms revenue and income are closely related but mean different things. Revenue is what a company earns from its core business activities, such as the sale of goods/services. Income, on the other hand, is revenue minus expenses.

Depending on the total amount of expenses deducted, income is either:

• Gross income, which is revenue minus the cost of goods sold, or 
• Net income, which is revenue minus all costs, including cost of goods sold, selling, general and administrative expenses (salaries, rent, energy, marketing, accounting, travel, etc), taxes, depreciation, and any other expenses. When people talk about income in business, they usually mean net income.

Income – or profit, as it is also often called – is derived from revenue. Another way to differentiate revenue from income is from their placement in financial statements. We know that revenue is the top line due to its placement at the top of the income statement. Income – or specifically net income – takes the last line on the income statement and is called the bottom line. While revenue and income are both important, net income is considered a little more vital because it acts as an indicator of a company’s profit and its ability to cover its operating expenses and grow without relying on external funds.

Revenue vs income – key differences

Revenue vs turnover

Turnover measures how quickly a company sells its inventory or collects cash from accounts receivables. It is a sign of the company’s efficiency in running operations and managing assets and resources. Some examples of turnover are inventory turnover (measures how fast companies sell and replenish inventory), working capital turnover (measures how effectively companies generate sales for each dollar used), and employee turnover (ratio of employees who leave versus those who stay). While revenue and turnover have different meanings, they do correlate. For example, when companies manage their assets effectively to generate sales, it naturally brings in revenue.

Turnover vs revenue – key differences

Revenue vs earnings

In trade, earnings is often used synonymously with income and profit. Earnings comprise a company’s income after accounting for all business expenses. The earnings figure is represented on the income statement as net income. However, there are numerous classifications of earnings that set it apart from income – such as earnings before taxes (EBT), earnings before interest and taxes (EBIT), and earnings before interest, taxes, depreciation, and amortisation (EBITDA). Earnings also form the basis of important financial metrics such as earnings per share (EPS), which measures profitability on a per-share basis, and the price-to-earnings (P/E) ratio, which compares stock price to EPS.

Earnings are, therefore, a tool to determine how profitable a business is. On the other hand, revenue represents a company’s total sales, reflects how much the company earns from sales, and how many customers it has. In contrast, earnings indicate how well a company manages its finances.

Earnings vs revenue – key differences

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