“Sales” and “revenue” are terms that get thrown around a lot in business jargon. Sometimes they’re used to mean the same thing, but there are important differences between the two. For small business owners, it’s crucial to understand exactly what these terms mean in a business context — as well as how they relate to each other and the overall success of your business.
Simply put, you can think of revenue vs. sales this way:
- Sales is defined as income generated from the sale of goods or services to customers.
- Revenue is the total income of the business, including sales and other sources of funds coming in.
What Are Business Sales?
Sales consist of all amounts paid by customers to the company for goods or services.
- Gross or total sales consist of all the sales amounts coming in.
- Net sales is the gross sales amount minus any discounts or returns that reduce the total amount of the transaction.
What Is Business Revenue?
Business revenue is made up of all the income sources that bring funds into a company, including sales. Other examples of revenue sources include:
- Payments from trademarks and patents
- Sale of property
- Rental of real estate or property
Operating revenue consists of income related to the core activities of the business. For many businesses, sales may be their main source of operating revenues.
Meanwhile, non-operating revenue is made up of all other forms of income outside of the core business. See the list above for some examples.
Why Are Sales and Revenue Important?
Both sales and revenue figures are key performance indicators of any business, and they should be tracked closely. They demonstrate the health and viability of a business. Anyone examining a business’ performance (including owners/managers, accountants, investors, regulators and more) will be very interested in sales and revenue numbers.
Sales numbers can show how efficiently a company turns a profit on its core business — the heart of a business’ ability to make money for its owners. Meanwhile, revenue numbers speak to the business’ ability to bring in overall funds. Without income, there are no profits and there is no viable business.
For startup companies that may not yet turn a profit, revenues can be an indicator of profitability down the line. Promising revenues can entice investors and buyers seeking future potential growth.
Relationship Between Revenue, Sales and Profits
Profit (also known as net income) is the amount of money you have left over in a business once you have subtracted expenses from revenues over a certain time period. Making a profit in a way that benefits owners should be the ultimate goal of every business.
However, revenue is often examined more closely than profit by investors or potential creditors, because growing revenue determines the direction of the company. A company that can steadily bring more and more money into the business shows that its business model is sound and the business can continue to grow. Decreasing or stalled revenue is an indication of a stagnant business that will struggle.
But not all revenue and sales are created equal. Some income streams are more profitable than others, and businesses should prioritize growth of the most profitable revenue generating activities.
Revenue is closely linked to cash flow. Cash flow is made up of the total inflows and outflows of cash in a given period of time, and it can determine whether a business has enough funds to operate or not. If a business doesn’t bring in enough revenue to cover its expenses in real time, it’s not going to last long.
Total cash flow is calculated by taking total revenues and subtracting expenses, while operating cash flow focuses on inflows (operating revenues) and outflows related to a business’ core activities.
As an example, let’s consider a small construction business. Operating inflows would mostly consist of amounts paid by customers for construction projects. Outflows might include costs such as materials, overhead or subcontractor costs.
The timing of when revenue is actually received by a business is crucial to measuring cash flow. That’s because cash flow measures the actual cash on hand. Even if a sale has been agreed upon, it doesn’t count in cash flow until the amount actually arrives in your bank account. Our construction company, for example, could run into cash flow issues if it must pay for materials to start work on a job, but full payment from the customer won’t arrive until much later in the project.
Revenues and sales numbers are important elements of a business’ financial statements. On income and profit and loss statements, for example, total revenue will be on the first line. Often the types of revenue are broken down into different categories so it is clear which amounts are being generated by different parts of the business.
Revenue is also key to the cash flow statement, which shows cash inflows and outflows within a certain period of time as mentioned above.
Credit and Financing
Sales and revenue are key factors in getting loans or other types of funding. Lenders or investors want to see that the business can sustain itself and will be able to pay back any amounts borrowed. Many lenders won’t even considering lending money to a business unless it has a certain amount of revenue consistently coming in.
For some types of funding, revenue can be even more important than your business credit score. This is true for many online unsecured short-term loans.
Sales numbers, meanwhile, are key for merchant cash advance (MCA) financing, which offers businesses funds up front in exchange for a percentage of future credit or debit card sales. The MCA provider advances the business a lump sum and automatically deducts a portion of credit/debit sales daily until the advance is paid off (plus costs and fees). Often, businesses that use this type of funding may be otherwise unable to qualify for loans, even though they have strong daily credit card sales.
Money, Money, Money
Sales and revenue are the juice that keep your business going. It’s important for small businesses to understand the differences and relationship between the two…but it’s even more important to figure out how each can be improved for the maximum success of your business.
What have you learned in differentiating between your sales and revenue? Let us know on Twitter @Revenued_com.
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