Revenue, also known as Sales or Turnover, is what a business gets after engaging in business activities – usually, the sale of goods and services. Basically, revenue is a company’s income – and it can come from many sides, so to speak, such as royalties, interest, or a couple of other fees.
The revenue is also used to calculate the profits, or net income, of a certain company – you subtract the total revenue from the total expenses of a certain period.
When it comes to the balance statement, Revenue is considered as top line, because of its position on the income statement – moreover, Revenue is a subsection of the Equity section and, therefore, increases equity.
Business Revenue
Revenue can be of three types – but, clearly, the most important type is the Business Revenue. This represents the money income that comes from those activities that are considered ordinary for a certain corporation, partnership, or company.
Revenue can be earned by selling either goods or services – for example, a market earns its revenue by selling goods while a translation office does so by selling its translation services.
Furthermore, revenue can also be earned via fees and interest that’s generated by the lending of assets to certain individuals or organizations – in this respect, we mention banks and car rentals, for example.
Revenue’s Importance
As it can be found at the top of the financial statement, it’s only natural that the revenue holds some degree of importance. It is mainly used to measure a certain company’s performance, by comparing the revenue (asset inflows) with expenses (asset outflows).
This comparison has net income as result – but revenue is just as important. For example, most analysts take a look at the Revenue number and, depending on it, state whether the company is performing in a positive or in a negative way.
Moreover, a high net income growth does not always mean that the company is performing well – the net income might grow, but the company might not be able to produce significant revenue growth. There must be a balance between the two, especially if the company wants to have a high value and a high stock price.
Attached Financial Ratios
Naturally, revenue can’t work out on its own – several financial ratios depend on it and it depends on them as well. Among these ratios, the most important ones are the profit margin and gross margin.
Profit margin, for example, is usually calculated in order to determine whether a company is efficient or not when it comes to turning revenues into profits.
On the other hand, gross margin is calculated by subtracting the cost of goods sold from the revenue – it is mainly used to determine how well the sales of products/ services can cover the direct variable costs that are related to the production of goods.
The Bottom Line
In short, revenue can be seen as one of the main gears of the clockwork that is a company – it determines its efficiency, performance, and ability to turn its inventory into cash.