In order for a business to be profitable, it must be making more money than it’s spending. Sounds simple, right?
It is simple in theory, but most businesses have multiple expenses and sales taking place each month, meaning money is constantly coming in and out. In practice, it can get complicated to track the cash flow.
For the purpose of keeping tabs on how much money your business is actually making, you will need to calculate the difference between your gross revenue and net revenue. If you’re asking yourself, “What’s net revenue; is it the same as net income?” Don’t worry, we’ve got you covered.
To clarify, gross revenue is the amount of money a business earns from sales over any given period of time. The definition of net revenue, AKA net income, is when you take that number and subtract any outgoing expenses over the same period of time.
In other words, gross revenue is the total amount of money your business has earned from sales, and net revenue is the amount of money you will actually take home after subtracting expenses.
Gross vs. net revenue
If gross vs. net revenue were a math problem, it would look something like this:
Gross revenue – Expenses = Net revenue
Now, let’s solve the eXpenses. Understanding what constitutes as an expense is absolutely crucial when figuring out the difference between gross and net revenue. Just as with any math problem, one mistake is all it takes to skew the results. In this case, failure to account for all expenses will leave you with an incorrect number for net revenue.
Some common expenses businesses need to keep track of are:
- Manufacturing costs/purchase inventory: the amount of money it costs your company to create or buy your product or service
- Rent/bills: If you have an office space or storefront you will pay rent, water, and electric each month.
- Payroll: forgetting to pay your employees is never a good idea! And don’t forget about benefits and bonuses.
- Supplies: Think everything from printer paper to light bulbs – any and all supplies you need to keep your business running.
- Marketing/advertising costs: You may hire someone to build your website or handle your bookkeeping, all CRM or other software costs, Google ads, etc.
- Miscellaneous tech: Don’t forget other types of tech like Outlook subscriptions for your employees.
- Taxes: Neglect to pay your taxes and you will find your business in hot water!
- Legal fees: It’s good to have a lawyer on hand (even if they’re not on retainer, have a relationship) in case of any “hot water” situations…
While these are just a few of the most common examples of business expenses, it should give you an idea of how many little things a business spends money on, and how costs can add up. Tracking each tiny expense is the only way to make sure nothing slips through the cracks, which is sometimes easier said than done.
Up until this point “keeping track” of gross revenue and net revenue might still seem like an abstract concept. In the accounting world, “keeping track of” is otherwise known as reporting. Reporting can be done manually, but it might be easier to use accounting software to lighten some of the load and keep things organized.
Gross revenue reporting
Every month you will submit a cash flow statement outlining the amount of money your business took in over the past month. Reporting gross revenue is pretty simple, just add up all the sales you have made over the reporting period and you’re good to go.
One thing to note is that gross revenue only accounts for sales and does not include any loans, donations, or other money related contributions your business may have received.
Net revenue reporting
Net revenue reporting is a tiny bit more complex than gross revenue reporting, but don’t get intimidated. When reporting net revenue, all you have to do is remember our math equation from earlier.
Just in case you need a refresher:
Gross revenue – Expenses = Net revenue
You might have heard the term “bottom line” when it comes to revenue reporting. Net revenue is your bottom line. Think of it this way, your net revenue is the money you will actually see at the end of a reporting period, bottom line!
To put everything in perspective, let’s look at an example. A spa makes $50,000 in sales over a month. The business’s gross revenue for the month is $50,000 – easy!
Now, to calculate net revenue, the spa owner takes the $50,00 and subtracts the expenses; cost of rent, utility expenses, the salaries of the employees, the amount that the store paid for their inventory of products to sell to customers, massage oil, laundry expenses, and any other costs. Once the business owner subtracts all these expenses from the $50,000, they will be left with the net revenue.
When to use gross and net revenue calculations
Gross revenue paints a picture of how your business is doing when it comes to making sales. Tracking sales is a huge part of growing your business. If your sales aren’t going well – you know your business is not going to be profitable.
Gross revenue reporting is a way to monitor not only income alone but net revenue retention. In other words, gross revenue calculations can also be useful for noticing trends in customer behavior and whether or not you are successful in customer retention. Is your revenue being generated from your existing customer base or new customers?
However, sales is only one piece of the puzzle.
Without calculating net revenue, you have no way of knowing whether or not your business is actually profitable. If you are only paying attention to the money coming in, you could be putting out twice as much and be unaware. Net revenue or net incomes gives you the bigger picture.
Looking at gross revenue without net revenue will give you a skewed view of your business, but it goes both ways. If you only look at your net revenue, you will be clueless as to whether or not fluctuations in sales led to this number or excessive expenses.
Think of gross and net revenue as the dream team.
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