Analyzing Revenue and Sales on Your Income Statement
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 sometimes serve as a gauge of potential profitability in the future.
Revenue vs. Profit
While terms like "revenue" and "sales" factor into a company's profits, the correlation is less direct than a beginning investor might expect. Revenue would only directly translate into profit if it cost absolutely nothing to run the business. In the real world, there are costs to take into account—everything from salaries and rent to production and shipping costs.
Since profits take all costs into account, they come last on the income statement, and that's where you get the term "bottom line." The bottom line is profit, and the top line is revenue. In between, you get the details that further explain those numbers.
Let's look at a simplified, hypothetical example. If you owned a pizza parlor and sold 10 pizzas for $10 each, you would record $100 of revenue, regardless of your profit or loss. However, the ingredients for each pizza cost $1, the gas to operate the oven costs $1 per pizza, and it costs $1 to pay the employee for their time making and delivering the pizza. Therefore, 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.
Another cost that's common, but slightly different from those mentioned above, is "reserve for allowance of returns." Let's say a business knows, on average, 1% of its sales end up being returned by customers. To account for this, that business might include that 1% reduction in the revenue figure—as that is what is likely to happen.
From the perspective of an owner or stockholder, there can be a mistaken belief that growing sales are always a good thing. While this is generally true, there can be exceptions. If growth is financed by diluting existing stockholders, taking on excessive amounts of debt, or engaging in riskier activities, it can partially or totally wipe-out profits by the time you get to the bottom line. Growth in sales or revenue should not be the goal by itself. The objective 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 capacity over the long-run. After all, if you're an investor or owner, it's your hard-earned money that is at risk in the enterprise.
Real World Revenue Example: Starbucks
Many companies break revenue or sales up into categories to clarify how much was generated by each division. 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 specifics like geographic region. Clearly defined and separate revenue sources can make analyzing an income statement much easier. It allows for more accurate predictions of future growth. You can also find sales figures for Starbucks (or any company) in its annual report or Form 10-K filing.
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 locations. 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 available, the figures here come from Starbucks' Q4 2019 re-segmentation and statements of earnings reclassifications. For comparison, there are also figures from Starbucks' annual report for the fiscal year 2017. The figures are presented "in millions," which means you'll need to multiply the number by 1 million to get the true revenue figure.
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.
|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|