What is Sales Revenue?
Sales revenue and revenue are terms often used interchangeably. But the definition of sales revenue is the revenue that comes from sales of product and services, while revenue includes income generated from things not directly related to the core business, such as income generated from interest on savings or cash paid out by dividends. This is classified as non-operating income.
Eighty percent of CFOs said KPIs related to revenue, income and sales growth were the most important in Brainyard ‘s State of the CFO survey. Accurately tracking sales revenue is the foundation of the income statement and is the key determinate of profitability for the business. It is also an essential component when calculating other important 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 a company’s core business. Indirect revenue in many cases is a result of one-time events that have no bearing on the long-term sustainability of the business. It is not a key indicator for business leaders, financers or investors on how successful and profitable the company’s core products and services are.
Sales Revenue Explained
Sales revenue is recognized on the income statement for the month in which the product or service was delivered or fulfilled, according to generally accepted accounting principles (GAAP) and the recent pronouncements by the Accounting Standards Codification and International Financial Reporting Standards that specifically addressed the rules for revenue recognition. For example, say online retailer Roosevelt’s Bears and Accessories sold 40 teddy bears in June for $25 a bear and collected $1,000 in receipts. But it delivered only 20 of them in June. It can only recognize revenue for those 20 bears, making recognized sales revenue for June $500 and the remaining $500 of unfulfilled orders gets recorded to deferred revenue.
Additionally, say customers returned four bears sold in May. That $100 is subtracted from the sales 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 in interest during this accounting period.
In this example, sales revenue is everything earned from the sale of the bears. This is the top line of the income statement. But the company actually earned revenue from activities not related to its core business—the money generated from interest. This is also revenue, but it is non-operating or indirect revenue. In a multi-step income statement, non-operating revenue does not count toward gross revenue. It is recognized after sales revenue, costs of goods sold and operating expenses in calculating the bottom line.
Why Is Sales Revenue Important?
By accurately calculating and recognizing sales revenue, the business can:
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 categories are performing and which are struggling. The company can then adjust its strategy accordingly. For example, it could increase the next month’s production plan to meet demand for 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 to businesses under a certain revenue threshold.
In some industries, especially in software, revenue is a big factor in calculating valuations because it can signal growth or an increase in market share.
What Does Sales Revenue Include?
Sales revenue includes all sales of products and services but does not necessarily count those sales in real time. Using our example above, Roosevelt’s sold and received payment for 40 bears in June at $25 a bear for a total of $1,000. Let’s say Roosevelt also mended five bears at a cost of $20 a bear. Customers paid for those mended bears, but they will not be returned to customers until July. Under accrual basis accounting, sales for services of those five bears cannot be counted on June’s books. That revenue must be recognized when the bear is delivered to the customer. This is called deferred revenue.
Sales revenue does not include the cost of goods sold (COGS)—the costs associated with the materials, labor and manufacturing of the bears themselves. It also does not include income earned on activities that are not related to the company’s core business of making and mending bears.
Sales Revenue Formula
Sales revenue is calculated by multiplying the number of products or services sold by the price per unit.
Sales Revenue = Units Sold x Sales Price
How to Calculate Sales Revenue and Example
Sticking with the example of Roosevelt’s Bears and Accessories, sales revenue is calculated as:
Product revenue: 40 Bears x $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 the business’ core operating activities. The sale of bears that result in cash for the business is sales revenue.
Sales Revenue and the Income Statement
Let’s take a look at where revenue and non-operating income are included on this multi-step income statement example from the U.S. Small Business Administration.
Gross sales represents sales revenue. Gross sales minus the sales returns and allowances derives net sales revenue. Net sales revenue less the cost of goods sold comprises gross profit (or loss).
Net operating income is determined by subtracting operating expenses from gross profit to arrive at net operating income. If the business doesn’t have any income from non-operating activities, the net operating income is also EBIT—earnings before interest and taxes. If it has income from non-operating activities, that is added before subtracting costs associated with interest and taxes to get the net income (or loss), which is also known as the bottom line.
This automated form is made available compliments of CCH Business Owner’s Toolkit
|[Your Company Name]
For the Year Ended [MM, DD, 200X]
|Less:||Sales Returns and Allowances||$0.00|
|Cost of Goods Sold:|
|Cost of Goods Sold||$0.00|
|Gross Profit (Loss)||$0.00|
|Credit Card Fees||$0.00|
|Dues and Subscriptions||$0.00|
|Permits and Licenses||$0.00|
|Net Operating Income||$0.00|
|Gain (Loss) on Sale of Assets||$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 an important capability for any business. Accurate measurement of sales revenue is the foundation for making important decisions and setting the direction for business success. Forecasting and KPIs will differ according to your industry and business model—and will benefit from financial management software.
To forecast sales revenue, it helps to further categorize the types of revenue—whether the revenue is transaction-based, services-based, project-based and/or recurring. Different forecasting models are employed for different types of revenue sources.