Net Revenue vs. Gross Revenue: Differences and What to Know
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To keep up with balancing your finances, you need to keep up with all facets of your revenue—but what is the difference between gross vs. net revenue? While these two concepts are connected, they do refer to two distinct values.
First, as a business owner, you need to get a complete picture of your company’s financial health. Gross revenue shows you how much money your company made before expenses. Net revenue tells you how much money your company keeps. You need both to compare income and costs.
Second, miscalculating these amounts could lead to repercussions when it comes to paying taxes (and getting financing). You may not be paying or saving the right amount of money if you miscalculate your net revenue.
To help you get a better understanding of what gross vs. net revenue actually means, we’ll discuss the difference in detail, compare revenue vs. income, and explain why these values matter.
What’s the Difference Between Gross and Net Revenue?
As mentioned, your gross vs. net revenue values are the total money you made vs. the amount of money you made after expenses. Finding your calculated net revenue is simple. You can find yours by doing the following math:
For example, if you earned $11,744.50 last quarter, subtract the sum of all your expenses from that amount. Expenses do include taxes, but they also include:
- Rent and utilities: If you have an in-person office space, you must include your rent, electricity, water, and energy bills.
- Marketing: This covers all marketing costs including web development, Google AdWords, printed flyers, conference tables, and more.
- Administration: If you hire an external consultant, their fee is deducted from your gross revenue.
- Legal costs: This covers any royalties, lawyer fees, or other legally obligated payments.
- Employee compensation: This includes salaries, health benefits, commissions, and retirement benefits.
- Supplies. Anything you need in your office space. Whether it’s filing cabinets, paper, coffee machines, or toilet paper.
- Technology: This would include any software subscriptions or licenses. Typically, computers would be listed under supplies.
- Interest payments: Note that you would only deduct your interest payments to calculate net revenue. Dividend payments are calculated later.
- Charitable donations. If you made any donations, you should also note that some charitable donations are tax deductible.
- Any other overhead costs.
It’s important to get a clear picture of the difference between your gross and net revenue. If your net revenue is substantially lower than your gross, consider how you can save on your expenses.
Credit: Pavel Danilyuk
How Do You Calculate Gross Revenue?
You need an accurate gross revenue number to calculate your net. However, there isn’t any equation to determine this value. It’s as simple as this:
For this reason, gross revenue is also frequently referred to as gross sales. This amount doesn’t include any capital contributions or debt (with some exceptions). You also need to include it on each cash flow and income statement as top-line revenue.
Net revenue reflects your company’s profitability, but you also need to keep an eye on your gross revenue. You can use your gross revenue total to get information about:
- Tracking sales volume
- Verifying that salespeople are hitting their targets
- Ensuring that your market share is growing
- Checking to see if you made fewer sales or if heightened expenses are the issue (if sales are down)
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What’s the Difference Between Revenue and Income?
Revenue and income are often used interchangeably in everyday conversation, although they have slightly different meanings on financial statements. You may also encounter instances where the word revenue is used alone. Begging the question “is revenue net or gross?”
Generally, the word “revenue” alone refers to your gross revenue, and net revenue would be your income. Net income is the same thing as net revenue, but gross income is different than gross revenue.
Gross income, also known as gross profit, is your gross revenue minus the total costs of goods sold (COGS). This includes the costs of manufacturing your products and supply chain purchases.
COGS could be subtracted in your net revenue calculation as well, amongst other expenses, but gross income calculations only subtract your COGS. This is because you can use your gross profit amount to measure how efficiently you use your resources.
Other Considerations
As you calculate your gross and net sales, other factors may affect your ultimate financial picture. Consider the following:
Gross and Net Profit Margins
Your gross profit margin is a percentage that may reflect the effectiveness of new management practices. For example, if you recently introduced automation to your manufacturing process, your gross profit margin can show you how much you’re saving on labor costs.
You can calculate your gross profit margin by doing the math below:
Comparatively, your net profit margin tells you how much income you generate with every dollar in your net revenue. It can also be expressed as a percentage.
In this equation, R = revenue, E = expenses (other than COGS), I = interest, and T = taxes.
Obligors
An obligor is a person or company that’s legally obligated to provide another with financial benefits. You may be someone else’s obligor or someone else may be an obligor for you. This position affects which values you include in your gross revenue vs. net revenue.
For example, imagine that you’re a supplier that controls production costs and prices. In this case, resellers are your obligators. You would include product sales to your resellers as gross revenue.
Comparatively, if you’re the reseller, revenue off resold products would probably be net.
Credit: Christiann Koepke
Currency Exchanges
Exchange rates also alter your gross revenue amount. Always write your income statements in the currency that you primarily do business in. If you work in other regions, you must exchange the amounts made in those regions for your primary currency.
Returning to the example where your product or service made $11,744.50 last quarter, imagine that you primarily work in USD, but $1,761.67 of that amount was paid in CAD. As of 2023, $1 USD = $0.75 CAD.
So, that $1,761.67 would become $1,316.08 and your $11,744.50 would become $11,298.91.
Cash Flow
Cash flow is a net amount that you can confidently transfer into and out of your company. It doesn’t necessarily represent your overall growth—it’s more of a liquidity indicator. Yet a consistently volatile cash flow over the year will damage your annual revenue.
The number of sales you made over the last period won’t change your bills. If your cash flow is volatile, it’s more difficult to pay your regular bills on time. Late payments may collect interest which increases the amount of money you owe.
If this becomes a habit, your annual revenue will decrease drastically. So, it’s important to keep your cash flow health in check year-round. Poor cash flow in spring can have surprising repercussions on your revenue report next winter.
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Strengthen Your Annual Revenue With a Healthy Cash Flow
Small businesses always have expenses, but sales may go up and down. Maintain the healthy cash flow you need to keep your annual revenue strong—all with help from Credibly. Our small business loans and financing give you the right amount you need to stay on top of every expense. Talk to an expert to find out which financing options suit you. |
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Featured Photo Source: Blake Wisz
