What is Sales Revenue?
Sales revenue and revenue are terms often used interchangeably. But the definition of salesrevenue is the revenue that comes from sales of product and services, while revenue includesincome generated from things not directly related to the core business, such as incomegenerated from interest on savings or cash paid out by dividends. This is classified asnon-operating income.
Key Takeaways
Eighty percent of CFOs said KPIs related to revenue, income and sales growth were the mostimportant in Brainyard ‘s State of the CFO survey(opensin newtab). Accurately tracking salesrevenue is the foundation of the income statement and is the key determinate ofprofitability for the business. It is also an essential component when calculating otherimportant KPIs as well—KPIs like Days Sales Outstanding (DSO), Customer Lifetime Value(CLV)to name a few.
The benefit of sales revenue is that it points to the success and profitability of acompany’s core business. Indirect revenue in many cases is a result of one-time eventsthathave no bearing on the long-term sustainability of the business. It is not a key indicatorfor business leaders, financers or investors on how successful and profitable thecompany’score products and services are.
Sales Revenue Explained
Sales revenue is recognized on the income statement for the month in which the product orservice was delivered or fulfilled, according to generally accepted accounting principles(GAAP) and the recent pronouncements by the Accounting Standards Codification andInternational Financial Reporting Standards that specifically addressed the rulesfor revenue recognition. For example, say online retailer Roosevelt’s Bears andAccessoriessold 40 teddy bears in June for $25 a bear and collected $1,000 in receipts. But itdelivered only 20 of them in June. It can only recognize revenue for those 20 bears, makingrecognized sales revenue for June $500 and the remaining $500 of unfulfilled orders getsrecorded to deferred revenue.
Additionally, say customers returned four bears sold in May. That $100 is subtracted from thesales revenue making the net recognized revenue for June: $400.
Revenue vs. Sales Revenue—How Do They Differ?
In the previous example, revenue from teddy bear sales is considered direct sales revenue.But let’s also say that the company has cash in the bank that earned an additional$100 ininterest during this accounting period.
In this example, sales revenue is everything earned from the sale of the bears. This is thetop line of the income statement. But the company actually earned revenue from activitiesnot related to its core business—the money generated from interest. This is alsorevenue,but it is non-operating or indirect revenue. In a multi-step income statement, non-operatingrevenue does not count toward gross revenue. It is recognized after sales revenue, costs ofgoods sold and operating expenses incalculating the bottom line.
Why Is Sales Revenue Important?
By accurately calculating and recognizing sales revenue, the business can:
Measure profitability.
Businesses need sales revenue to measure the profitability of core business activities.
Decide where to invest.
Breaking out sales revenue by product category helps businesses see which items or categoriesare performing and which are struggling. The company can then adjust its strategyaccordingly. For example, it could increase the next month’s production plan to meetdemandfor faster moving products.
Determine whether it’s eligible for certain loans or contracts.
Some loans and opportunities to compete for government contracts are only available tobusinesses under a certain revenue threshold.
Determine valuation.
In some industries, especially in software, revenue is a big factor in calculating valuationsbecause it can signal growth or an increase in market share.
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What Does Sales Revenue Include?
Sales revenue includes all sales of products and services but does not necessarily countthose sales in real time. Using our example above, Roosevelt’s sold and receivedpayment for40 bears in June at $25 a bear for a total of $1,000. Let’s say Roosevelt also mendedfivebears at a cost of $20 a bear. Customers paid for those mended bears, but they will not bereturned to customers until July. Under accrual basis accounting, sales for services ofthose five bears cannot be counted on June’s books. That revenue must be recognizedwhen thebear is delivered to the customer. This is called deferred revenue.
Sales revenue does not include the cost of goods sold (COGS)—the costs associated withthematerials, labor and manufacturing of the bears themselves. It also does not include incomeearned on activities that are not related to the company’s core business of making andmending bears.
Sales Revenue Formula
Sales revenue is calculated by multiplying the number of products or services sold by theprice per unit.
Sales Revenue = UnitsSold x Sales Price
How to Calculate Sales Revenue and Example
Sticking with the example of Roosevelt’s Bears and Accessories, sales revenue iscalculatedas:
Product revenue: 40 Bearsx $25 = $1,000
Services revenue: 5 Bears Mended x $20 =$100
The most important thing to remember about sales revenue is that it must come from thebusiness’ core operating activities. The sale of bears that result in cash for thebusinessis sales revenue.
Sales Revenue and the Income Statement
Let’s take a look at where revenue and non-operating income are included on thismulti-stepincome statement example from the U.S. Small Business Administration.
Gross sales represents sales revenue. Gross sales minus the sales returns andallowances derives net sales revenue. Net sales revenue less the cost of goods soldcomprises gross profit (or loss).
Net operating income is determined by subtracting operating expenses from gross profit toarrive at net operating income. If the business doesn’t have any income fromnon-operating activities, the net operating income is also EBIT—earnings beforeinterest andtaxes. If it has income from non-operating activities, that is added before subtractingcosts associated with interest and taxes to get the net income (or loss), which isalso known as the bottom line.
This automated form is made available compliments of CCH Business Owner’sToolkit
| [Your Company Name] IncomeStatement For the Year Ended [MM, DD, 200X] | ||||||
|---|---|---|---|---|---|---|
| Revenue: | ||||||
| Gross Sales | $0.00 | |||||
| Less: | Sales Returns and Allowances | $0.00 | ||||
| Net Sales | $0.00 | |||||
| Cost of Goods Sold: | ||||||
| Beginning Inventory | $0.00 | |||||
| Add: | Purchases | $0.00 | ||||
| Freight-in | $0.00 | |||||
| Direct Labor | $0.00 | |||||
| Indirect Expenses | $0.00 | |||||
| $0.00 | ||||||
| Less: | Ending Inventory | $0.00 | ||||
| Cost of Goods Sold | $0.00 | |||||
| Gross Profit (Loss) | $0.00 | |||||
| Expenses: | ||||||
| Advertising | $0.00 | |||||
| Amortization | $0.00 | |||||
| Bad Debts | $0.00 | |||||
| Bank Charges | $0.00 | |||||
| Charitable Contributions | $0.00 | |||||
| Commissions | $0.00 | |||||
| Contract Labor | $0.00 | |||||
| Credit Card Fees | $0.00 | |||||
| Delivery Expenses | $0.00 | |||||
| Depreciation | $0.00 | |||||
| Dues and Subscriptions | $0.00 | |||||
| Insurance | $0.00 | |||||
| Interest | $0.00 | |||||
| Maintenance | $0.00 | |||||
| Miscellaneous | $0.00 | |||||
| Office Expenses | $0.00 | |||||
| Operating Supplies | $0.00 | |||||
| Payroll Taxes | $0.00 | |||||
| Permits and Licenses | $0.00 | |||||
| Postage | $0.00 | |||||
| Professional Fees | $0.00 | |||||
| Property Taxes | $0.00 | |||||
| Rent | $0.00 | |||||
| Repairs | $0.00 | |||||
| Telephone | $0.00 | |||||
| Travel | $0.00 | |||||
| Utilities | $0.00 | |||||
| Vehicle Expenses | $0.00 | |||||
| Wages | $0.00 | |||||
| Total Expenses | $0.00 | |||||
| Net Operating Income | $0.00 | |||||
| Other Income: | ||||||
| Gain (Loss) on Sale of Assets | $0.00 | |||||
| Interest Income | $0.00 | |||||
| Total Other Income | $0.00 | |||||
| Net Income (Loss) | $0.00 | |||||
Sales Revenue and Financial Forecasting
Accurately tracking sales revenue and the ability to effectively analyze the details is animportant capability for any business. Accurate measurement of sales revenue is thefoundation for making important decisions and setting the direction for business success. Forecasting and KPIs willdiffer according to your industry and business model—and will benefit from financialmanagement software.
To forecast sales revenue, it helps to further categorize the types of revenue—whether the revenue istransaction-based, services-based, project-based and/or recurring. Different forecastingmodels are employed for different types of revenue sources.
