Gross vs. Net Revenue

Gross revenue and net revenue are distinct from each other, but both are important for small businesses to track.

Gross revenue is the sum of money a company makes through sales in a specific time frame.
Net revenue is the difference between a company’s revenues for a specific time period and its costs for the same time period.
While net revenue compares your money to your costs, gross revenue reveals how many sales your company is generating.
The goal of this essay is to help business owners become more financially and accountingly literate.

The total gross sales made by a corporation during a specific time period are referred to as gross revenue in accounting. It is the entire amount of money that the company got, with no deductions made for any charges. The difference between a company’s gross revenue and all of its costs, including fixed costs, is known as net revenue or net income.

Because gross revenue only gives you a partial image of your company’s total picture, it’s critical to understand the differences between the two. Budgeting cannot be done with the gross sales of your business. Although net income offers a far more complete picture, it can be difficult to understand without knowing the context of gross sales.

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What is the difference between gross revenue and net revenue?

Your company’s costs are the same as the gap between your gross and net revenue. These consist of additional variable expenses and fixed costs, as well as the direct costs of products sold (costs that are directly attributable to specific units or product lines) (overhead).

The following factors contribute to the difference between gross and net revenue:

Cost of goods sold:

These are the direct expenses your business has to make products or buy inventories.

Marketing costs:

These expenses cover things like the price of developing a website, marketing, and advertising.

Office supplies:

Everything you need for the office, from paper clips to toilet paper, is included in this.

Rent and utilities:

This entails paying for resources including buildings, water, power, and related services.

Employee compensation:

These covers pay and benefits for retirees as well as salary and commissions.

Taxes:

Before you get at net income, payroll taxes, excise taxes, sales taxes, and income taxes are all subtracted.

Legal and administrative costs:

Any costs paid to accountants, attorneys, and other consultants are deducted from your net income.

Technology:

Software and other subscriptions or licences are included in these prices.

Dividend payments are often not included in the calculation of net revenue, although interest payments are another item that must be subtracted from gross revenue. These payments are subtracted later in the accounting process for your company, once net revenue has been determined.

Gross revenue reporting

The top-line revenue for your company will be shown on your income or cash flow statement. It is equivalent to your gross sales, which are all of the money that your business earned within a specific time period.

Although there isn’t exactly a formula for gross income, it might like this:

Using small business accounting software, you may calculate and report gross revenue, which is simply the entire amount of money that entered your company during the reporting period (in the form of sales, not capital contributions or loans).

Any expenses you made to produce the sales that resulted in this income are not included in this number.

Net revenue reporting

Net revenue is still quite simple to report, but it takes a little more work because there are additional computations. In accounting, your company’s net revenue is your bottom line and is determined by deducting all of your costs from your gross revenue for the reporting period.

Here is how to calculate net revenue:

This method can help you determine how much of your company’s total revenue remains after all costs have been deducted. It displays the overall profit made by your firm during a specific time frame.

Gross vs. net revenue examples

Take into account a retail clothes business with quarterly sales of $250,000. The business’s gross revenue for the quarter was $250,000 in total.

The owner or manager of the store starts with the gross revenue and then deducts the cost of goods sold (the amount the store paid to purchase inventory), the rent for the storefront, utilities, employee salaries, office supply costs, payroll, income, sales, and excise tax, as well as all other expenses. The store’s net revenue is the sum after all of those items are subtracted.

When to use gross vs. net revenue

Gross revenue is a very useful metric for measuring sales volume, making sure that your firm’s market share is increasing, and making sure that your salespeople are meeting their targets. However, it doesn’t reveal anything about the overall profitability of your business.

On the other hand, net revenue offers far more information than just gross sales and is excellent for assessing your profitability. However, net income has its limitations. For instance, it is difficult to determine the cause of changes in net income. You cannot determine if changes in your company’s net income are being caused by changes in sales or changes in costs without looking at your gross revenue for the same time period.

Gross vs. net revenue ratios

Both gross and net revenue are frequently employed in ratios and other indicators to show the health and success of a company’s finances.

One indicator of the profitability of your particular goods or services is the gross profit ratio. Gross profit ratio, also known as total profit margin, is the portion of a product’s or service’s gross sales that generates profit over the cost of production.

In this equation, net sales are defined as gross sales less returns and cost of goods sold.

Another indicator dependent on the income of your business, this time your net revenue, is the net profit margin, also known as return on revenue.

In other words, after deducting all overhead and fixed costs, your net profit margin represents the entire profitability of your company.