The first line on any income statement or profit and loss statement deals with revenue. The exact wording may vary, but you can look for terms like "gross revenue," "gross sales," or "total sales." This figure is the amount of money a business brought in during the time period covered by the income statement.
The total revenue figure is important because a business must bring in money to turn a profit. If a company has less revenue, all else being equal, it's going to make less money. For start-up companies that have yet to turn a profit, revenue can in some cases serve as a gauge of how much profit they will make in the future.
- The first line on an income statement deals with revenue.
- Revenue doesn’t always translate into profits, as there are costs to take into account.
- Businesses may reduce their revenue by a percentage to account for customer returns.
Revenue vs. Profit
While terms like "revenue" and "sales" factor into a company's profits, the correlation is less direct than a new investor might expect. Revenue would only directly translate into profit if there are zero costs to running the business. In the real world, there are costs to take into account, and these include everything from salaries and rent to production and shipping costs.
Since profits take all costs into account, they come last on the income statement. This is where you get the term "bottom line." The bottom line is profit, and the top line is revenue. In between, you'll see all the details that further explain those numbers.
A Sample Case Study
Let's look at a simple, hypothetical example. If you owned a pizza parlor and sold 10 pizzas for $10 each, you would record $100 of revenue. This figure is set. no matter your profit or loss. But there's more to the picture. The flour, yeast, and other ingredients to make each pizza cost $1, the gas to run the oven costs $1 per pizza, and it costs $1 to pay the chef for their time and labor making the pizza. So while you made $10 in revenue for each pizza, you have to subtract $3 in costs to learn the profit. The 10 pizzas you sold earned $100 in revenue, but just $70 in profit.
One other cost that's common, but slightly distinct from those listed above, is the "reserve for allowance of returns." Let's say a retail store knows that shoppers return 1% of its sales. To account for this, that retail store might include that 1% reduction in the revenue figure, as that is what is most likely to happen.
Returns and refunds can be a headache for small businesses because they affect net sales figures, profit, revenue, and many figures in their income statements. They must be tracked and accounted for in cash accounts and receipts on the balance sheet as well.
The Problem with Looking at Growth Alone
From the point of view of an owner or stockholder, growing sales may seem like a good thing, and while this is mostly true, there are flaws in this line of thinking. There are a few ways in which a growing sales figure can be misleading. For instance, if growth is financed by diluting existing stockholders, taking on excess amounts of debt, or engaging in risky activities, profits may be fully wiped out by the time you get to the bottom line. Growth in sales or revenue should not be the goal by itself. The goal is to achieve growth in profitable sales and revenue, adjusted for risk.
In short, you should only want a business to generate more sales if it is going to benefit you in some way over the long run. After all, if you're an investor or owner, it's your money at risk.
A Real World Case Study: Starbucks
Many companies break revenue or sales up into categories to clearly display how much each produced. For example, Starbucks' profits and losses (P&Ls) first give the basic numbers in an all-inclusive, consolidated table. Tables that appear later in the document break down those numbers by specific factors, such as region or model. When revenue sources are clearly defined and arranged in separate tables, reading an income statement is so much easier. You might say it's more "user friendly" for investors and laymen alike. It allows for people to more accurately predict future growth.
On the consolidated table, you will see that revenue is broadly broken down into three main categories: company-operated stores, licensed stores, and "other." "Company-operated stores" are standard Starbucks outposts. An example of a licensed store would be a Starbucks that opens within another business, such as a Starbucks kiosk within a grocery store.
To use the most recent data, the figures here come from Starbucks' Q4 2019 re-segmentation and statements of earnings reclassifications. To compare, there are also figures from Starbucks' annual report for the fiscal year 2017. The figures are given "in millions," which means you'll need to multiply the number by 1 million to get the true revenue figure.
|Starbucks Revenue for FY 2017 and FY 2018 (in Millions)|
|Fiscal Year Ended Sept. 30, 2018||52 Weeks Ending Oct 1, 2017|
|Total net revenues||$24,719.5||$22,386.8|
You can easily replace these figures with more recent data, as new releases become available. You can also try filling out a similar table for a completely different company, to practice finding the information.