What is ‘Revenue’
Revenue is the amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise. It is the top line or gross income figure from which costs are subtracted to determine net income.
Revenue is calculated by multiplying the price at which goods or services are sold by the number of units or amount sold.
Revenue is also known as sales on the income statement.
BREAKING DOWN ‘Revenue’
Revenue is the amount of money that is brought into a company by its business activities. Revenue is also known as sales, as in the price-to-sales ratio an alternative to the price-to-earnings ratio that uses revenue in the denominator.
There are different ways of calculating revenue, depending on the accounting method a business employs. Accrual accounting will include sales made on credit as revenue, as long as the goods or services have been delivered to the customer. It is therefore necessary to check the cash flow statement to assess how efficiently a company collects the money it is owed. Cash accounting, on the other hand, will only count sales as revenue if the payment has been received. When cash is paid to a company, this is known as a “receipt” to distinguish it from revenue. It is possible to have receipts without revenue – for example, if the customer paid in advance for a service that has not been rendered or goods that have not been delivered, this activity leads to a receipt, but not revenue.
Revenue is known as the top line because it is displayed first on a company’s income statement. Expenses are then deducted from revenue in order to obtain net income or profit, also referred to as the bottom line. The profit of a company is calculated simply as revenues minus expenses. In order to increase profit, and hence, earnings per share for its shareholders, a company can increase its revenues and/or reduce expenses. Investors will often consider a company’s revenue and net income separately to determine the health of a business. It is possible for net income to grow while revenue remains stagnant, as a result of cost-cutting; such a situation does not bode well for a company’s long-term growth. When public companies report their quarterly earnings, the two figures that receive the most attention are typically revenue and earnings per share (“earnings” being equivalent to net income). Subsequent price movement in stocks generally correlates to whether a company beat or missed analysts’ revenue and earnings per share expectations.
A company’s revenue may be subdivided according to the divisions that generate it. For example, a recreational vehicles department might have a financing division, which could be a separate source of revenue. Revenue can also be divided into operating revenue or sales from a company’s core business, and non-operating revenue which is derived from other secondary sources. As these non-operating revenue sources are often not predictable or recurring, they can be referred to as one-time events or gains. For example, proceeds from the sale of an asset, a windfall from investments, or money awarded through litigation would be considered non-operating revenue.
In the case of government, revenue is the money received from taxation, fees, fines, inter-governmental grants or transfers, securities sales, mineral rights and resource rights, as well as any sales that are made.
For non-profits, revenue is often referred to as gross receipts. Its components include donations from individuals, foundations and companies; grants from government entities; investments; fundraising activities; and membership fees.
In terms of real estate investments, revenue refers to the income generated by a property, such as rent, parking fees, on-site laundry costs, etc. When the operating expenses incurred in running the property is subtracted from property income, the resulting value is net operating income.