Total revenue is the amount of money your business made during a specific accounting period from the sales of its products or services. It is the first item you need to build the income statement, or profit and loss statement for your business, because it appears first on the income statement.
Total revenue is the amount of sales revenue you have made before your expenses are deducted on the income statement. It is the top line of the income statement as compared with the bottom line, which is net income or net profit. Net income is the metric that indicates what you have left after expenses are deducted.
To understand total revenue, you have to learn what it refers to, how it is calculated, what it tells you about your business, and other types of revenue to which it can be compared.
- Total revenue is revenue from all sources, both operating and non-operating, for which a business has a source document, usually a cash receipt, and it occurs within an accounting period.
- The total revenue of your business can help you decide how to price your product or service.
- To analyze your total revenue and whether it is appropriate, you can do a trend analysis and an industry analysis.
- The two major types of total revenue are operating and non-operating income.
What Is Total Revenue?
The simplest definition of total revenue is that it is the amount of money a business receives during an accounting period from the sale of its products or services. It also can be defined as total sales for a business that are backed up by its cash receipts. For every sale, there must be a source document, which, in most cases, is a cash receipt.
If you use cash accounting in your business, total revenue is the sales revenue from cash that has been received. If you use accrual accounting, total revenue is revenue that is recognized but not yet received, and it’s called accrued revenue. Cash accounting recognizes revenue when it has been received. If you use accrual accounting in your business, it recognizes revenue when the transaction occurs rather than when payment is made. Usually, only the smallest businesses use cash accounting.
In economics, total revenue is stated differently but ultimately means the same thing as total revenue in accounting. It is defined as the revenue received by a firm from the sale of its output.
How Do You Calculate Total Revenue?
From both an accounting and economics perspective, total revenue is calculated using the same equation.The only difference may be that the first term in the following equation may differ, depending on whether you use cash or accrual accounting.
After your business has generated income statements over a period of time, you can see the patterns and trends of your total revenue. This gives you a historical perspective on your total revenue.
Using the following equation gives you a tool to forecast what the price of your product should be in the present and future, along with the quantity of something that you have to sell to meet your sales goals:
Total Revenue = Quantity Sold x Price of the Product
If you sold 2,000 units of your product at $50 each, your total revenue would be $100,000 for that accounting period. If your sales are slow and you think you should drop the price of your product to $40 each, then your total revenue would be $80,000. How can you make up the $20,000 in lost revenue? You have to increase your volume of sales. Here is the calculation:
$100,000 (Total Revenue) = x (Quantity Sold) x $40 (Price)
$100,000/$40 = 2,500
The amount you have to sell to make up the lost revenue is 2,500 units of your product.
What Does Total Revenue Tell You About Your Business?
From the example above, you, as a business owner, know that if you have to drop the price of your product, you have to increase your sales by a specific amount. You can find out how much more you have to increase your sales to increase your gross profit by using the same equation. This equation works in reverse if you want to increase the price of your product. Pricing your product is a complicated issue in a small business, but these two formulas regarding total revenue give you a starting point.
Total revenue translates directly into gross profit after the cost of goods sold is removed. You only have the cost of goods sold if you manufacture your own product. If you sell a product you buy from someone else, then total revenue is actually your gross profit minus any returns you have or discounts you may give.
If you sell multiple products, you can use the same equation. Just add up the total revenue from each product and plug that into the equation.
You also can compare your total revenue year after year and do a trend analysis for your company to determine where it stands financially. Go one step further and compare your total revenue with your competitor’s total revenue by doing an industry analysis.
Both trend and industry analysis yield valuable insights into the financial health of your business.
Other Types of Revenue
There are two major types of revenue relevant to small businesses, but there are a number of different types of revenue streams. The two major types of revenue are:
Operating revenue is revenue your business earns from its main line of business. Selling your product or service and the revenue you earn from those sales is operating revenue. When you analyze your revenue position, you use only operating revenue in the equations because non-operating revenue is irregular in nature.
Non-operating revenue is received from any side activities your business performs. An example would be selling some of your equipment or vehicles that you don’t need. The money from those sales would be non-operating revenue because such sales would not constitute regular, steady revenue from operations.
Other Revenue Streams
Here are some of the most common types of other revenue streams:
- Unearned revenue (also known as deferred revenue): revenue received for a product or service yet to be delivered to your business
- Rent revenue
- Dividend revenue
- Interest revenue
- Brokerage fees
- Advertising fees
This is not an exhaustive list. Businesses earn different types of revenue based on the industry they are in and the activities they pursue.
Frequently Asked Questions (FAQs)
How does price elasticity affect total revenue?
Price elasticity refers to how the price of a product or service interacts with the demand for that product or service. If demand is elastic, then the demand—and the revenue as a result—will increase if the price goes down and vice versa. If demand is inelastic, then price increases or decreases doesn’t have as much effect on total revenue.
When does a company record revenue when it uses accrual accounting?
If a company uses accrual accounting, revenue is recognized when the transaction takes place, not when the revenue from the transaction is received.