What’s the Difference Between Gross Revenue vs. Net Revenue?
The definition of gross revenue is the total amount of money earned during a particular accounting time frame. All the gross sales a business makes from selling services, and goods fall in the category of gross revenue.
Meanwhile, net revenue is the resulting amount after the cost of goods sold and deductions of sales discounts.
In other words:
In short, gross revenue is the earnings of a business before the deduction of expenses related to producing that good or service. Net revenue results from the cost of goods sold expenses have been deducted from gross revenue to calculate gross profit.
Here is an excellent gross versus net revenue example. A shoe business sells one hundred pairs of shoes at $50 a pair. Their gross revenue is $5,000. To calculate net revenue, the company should make deductions to account for the cost of goods sold, the cost of damaged items, discounts applied, and returned goods.
Consider gross sales minus returns, damaged items, etc.
Another big difference in the gross revenue definition is that the all-inclusive sum needs no further adjustments after calculating total sales, especially when accounting for revenue. For net revenue, a business should consider possibilities like returns when calculating net sales.
For instance, a store selling electronic gadgets sees a higher rate of return because of the product’s nature. The business should keep a particular amount of working capital on hand to handle the number of anticipated returns.
Is it Necessary to Understand Gross vs. Net Revenue Differences?
Understanding your business’s income statement and net and gross revenue is crucial for running a successful company as a small business owner.
Being involved in your financial performance and understanding financial statements can help you make intelligent decisions. For example, you’ll know when to raise sales revenue and when to cut operating expenses, overhead costs, and the cost of goods sold to increase the net profit margin.
Gross revenue doesn’t tell the whole picture.
A business’s gross revenue can indicate a company’s financial health, but it doesn’t tell the whole picture. When calculating net income, net revenue reporting offers a better and clearer picture and could tell a slightly different story.
Your gross income might seem high, but if you factor in how much you’re making after expenses, your net earnings could indicate that total revenue might be too low to cover your company’s expenses.
Raising your gross profit margin could mean reducing the direct costs of goods sold and other expenses. If you know where to look on your financial statement, net income will tell you if you need to generate sales or eliminate certain liabilities.
How Does Gross Revenue vs. Net Revenue Affect Business Financing?
Are you thinking about getting a loan for business? You need to pay close attention to your gross revenue and net revenue. Not only do banks look at the debt service coverage ratio of the business, but they also assess the company’s gross revenue reporting from the core business.
Increasing gross revenue indicates a strong product line and fair demand in the market. That presents the potential for increasing company growth and sales with financing. That’s especially true if you plan on getting funding for company expansion, such as opening a new store location.
Net income will also give you an unofficial glimpse of if the business is profitable, but bear in mind that it’s also essential to remember that gross and net revenue isn’t enough to understand the company’s profitability. Lenders will consider much more than a company’s gross profit for loan products other than revenue-based financing.
What Are Your Business Expenses Costing & Earning You?
Are your company’s expenses producing a net profit or a net loss? After all overhead and other costs are calculated, you may want to look at what your business earns in top-line revenue vs. actual profit.
Increasing sales along and cutting costs could help you raise your profitability ratios. In turn, that can help you grow your company over time. Further, cutting off excess expenditures can make the difference between struggling to get by and opening a second location.
Small businesses should figure out if they can lower expenses for office supplies or shipping costs. Maybe employee payroll can be thinned out in some departments. Perhaps possibly refinancing any debt to cut interest payments.
In addition, you should always be looking to change anything your business does to pay less in income taxes. Lowering your income tax payments may not affect gross vs. net revenue reporting, but it does affect your bottom line, which matters the most.
Gross vs. Net Revenue: Final Thoughts
Business accounting can seem challenging, particularly if you are trying to get your books to apply for business financing.
As a small business owner, you likely feel your brain is at full capacity regarding financial knowledge and formulas. However, understanding gross and net revenue can help you make intelligent decisions about your business.
Everything will take time, and likely include some trial and error to determine what your gross and net revenues mean. However, after knowing how to read a financial statement, you’ll know what adjustments to make to optimize your business!