Revenue is the lifeblood of any business. But not all revenue is created equal. As a business owner or financial analyst it’s critical to understand the distinction between a company’s gross revenue and its net revenue. Though the terms sound similar they refer to very different financial metrics that serve different purposes.
In this comprehensive guide, we’ll break down exactly what gross revenue and net revenue are, when to use each one, and why both are vital to monitor for any organization.
What is Gross Revenue?
Gross revenue sometimes called gross sales, refers to the total amount of money a company brings in during a specific time period through the sale of goods services, or use of its assets by other entities. It does not account for any costs, expenses, returns, allowances, or discounts associated with earning that revenue.
For example, if a clothing retailer sells $1 million worth of merchandise in a month, its gross revenue for that month is $1 million. This remains the case even if the store offered discounts or promotions to generate those sales.
Gross revenue is calculated by simply tallying up all sales and income from the company’s core business activities over a set timeframe. There’s no formula required.
Some examples of items that contribute to gross revenue include:
- Revenue from sales of products and services
- Interest income
- Rental income from properties
- Licensing fees from use of assets or IP
Gross revenue provides a quick snapshot of sales volume and growth. It can be easily tracked and benchmarked period-over-period to identify trends and monitor the health of revenue-generating activities.
However, gross revenue alone reveals little about profitability or the actual health of a business.高额销售可能掩盖低利润。Large sales numbers may mask lower profits. To get the full financial picture, net revenue must also be considered.
What is Net Revenue?
Net revenue, sometimes referred to as net sales, is a company’s gross revenue minus any returns, allowances for damaged or missing goods, and any discounts or rebates applied to generate sales.
In other words:
Gross revenue
- Returns
- Allowances
- Discounts
= Net Revenue
The calculation does not stop there for most companies. Other common deductions include:
- Cost of goods sold (COGS)
- Sales commissions
- Credit card processing fees
- Shipping fees
- Taxes
Once all applicable deductions are subtracted from gross revenue, you’re left with the net revenue. This represents the actual profits earned from selling products or services.
For example, let’s say a company has $1 million in gross revenue over a period. But after factoring returns, discounts, COGS, and other expenses, the net revenue is only $600,000.
Monitoring net revenue gives a much more accurate view of profitability. It also helps businesses set prices appropriately to cover costs and generate sufficient income.
When to Use Gross Revenue vs. Net Revenue
As we’ve seen, gross revenue and net revenue serve different purposes:
Gross Revenue Uses
- Evaluating sales volume and growth
- Setting sales goals
- Benchmarking performance period-over-period
- Estimating market share
Net Revenue Uses
- Measuring profitability of products/services
- Determining pricing and margins
- Assessing overall company health
- Budgeting and forecasting
Savvy business leaders track both revenue types to get a complete picture of their company’s financial performance.
Gross revenue metrics make it easy to monitor sales activities but don’t tell the whole story. Net revenue better indicates profitability but can be harder to interpret without gross sales as context.
Using both together provides the full revenue snapshot needed to make smart strategic decisions.
Gross Revenue vs. Net Revenue: Key Differences
Now that we’ve defined gross revenue and net revenue individually, let’s recap some of the key differences:
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Gross revenue only accounts for income from sales and other core business activities. Net revenue factors in returns, discounts, allowances, COGS, and operating expenses.
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Gross revenue requires simple tallying. Net revenue involves more complex accounting to deduct appropriate expenses.
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Gross revenue is a top-line number for tracking sales volume. Net revenue shows actual profitability after costs.
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Changes in gross revenue could indicate shifts in sales activities. Changes in net revenue could point to issues with profit margins or expenses.
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Gross revenue is a useful benchmarking metric. Net revenue better informs pricing decisions.
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Gross revenue does not reflect company profitability. Net revenue presents a complete picture of financial health.
Monitoring both metrics is crucial for financial management, growth planning, and data-driven decision making.
Gross Profit Margin vs. Net Profit Margin
In addition to gross revenue and net revenue, two other important profitability metrics are gross profit margin and net profit margin. These use your revenue numbers to calculate overall profitability.
Gross Profit Margin
Gross profit margin represents gross profit as a percentage of net sales. It gives a basic snapshot of product/service profitability.
The formula is:
(Net Sales – COGS) / Net Sales = Gross Profit Margin
For example, if net sales were $1 million and COGS were $400,000, the gross profit margin would be 60%.
This shows the percentage of net sales retained as gross profit after accounting for direct costs.
Net Profit Margin
Net profit margin represents net income as a percentage of net sales. It provides an overall gauge of a company’s profitability after all expenses.
The formula is:
(Net Sales – All Expenses) / Net Sales = Net Profit Margin
For example, if net sales were again $1 million, and total expenses came to $800,000, the net profit margin would be 20%.
This metric helps assess if sales prices and volume ultimately produce satisfactory income for the business after broader expenses are factored in.
Tracking these supplemental percentages along with net and gross revenue offers a holistic profitability analysis.
Real World Examples
Let’s look at a few examples to see gross revenue vs. net revenue in action:
Example 1: SaaS Company
- Gross revenue last month: $120,000
- Returns due to canceled accounts: $5,000
- Discounts offered: $8,000
- Processing fees: $9,000
- Hosting and bandwidth costs: $22,000
Net revenue = $120,000 – $5,000 – $8,000 – $9,000 – $22,000 = $76,000
Using net revenue shows the company that true profit is lower than gross monthly sales would imply. This data could help the business reassess pricing plans or account management costs.
Example 2: Online Retailer
- Gross revenue this quarter: $1.5 million
- Allowances for damaged goods: $15,000
- Shipping fees: $125,000
- COGS: $725,000
- Sales commissions: $60,000
- Advertising costs: $75,000
Net revenue = $1.5 million – $15,000 – $125,000 – $725,000 – $60,000 – $75,000 = $500,000
Despite strong quarterly sales, this company’s net revenue reveals narrower profits. This information might prompt reducing commission rates or renegotiating supplier and shipping contracts.
Example 3: SaaS Startup
- Gross revenue last year: $480,000
- Returns due to canceled accounts: $22,000
- Discounts offered: $35,000
- Payment processing fees: $28,000
- Data center and staff costs: $260,000
Net revenue = $480,000 – $22,000 – $35,000 – $28,000 – $260,000 = $135,000
This young company sees solid initial traction, but net revenue indicates operations are not yet profitable. Leaders can now adjust pricing, target markets, and manage expenses accordingly.
Monitoring gross and net revenue will continue providing the data needed to guide smart decisions as the business matures.
Key Takeaways: Monitor Both for Success
Here are some key takeaways on using gross revenue vs. net revenue effectively:
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Gross revenue provides insight into sales volume. Net revenue presents actual profitability.
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Tracking both metrics together delivers a complete revenue picture.
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Gross revenue supports sales forecasting and goal setting. Net revenue informs strategic decisions.
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Gross revenue is a useful benchmark over time. Net revenue indicates wider financial health.
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Changes in gross revenue could signal sales fluctuations. Changes in net revenue may identify margin issues.
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Gross and net margins further analyze overall profitability.
Savvy businesses track gross revenue, net revenue, and related margins to access all the data they need for smart strategic planning and financial management. Monitoring both top-line sales volume and bottom-line profits is key to making sound data-driven decisions.
With the right revenue analytics, any organization can better understand their financial performance, pinpoint issues, and maximize opportunities for lasting success.
What’s the Difference Between Gross Revenue vs. Net Revenue?
The definition of gross revenue is the total amount of money earned during a particular accounting time frame. All the gross sales a business makes from selling services, and goods fall in the category of gross revenue.
Meanwhile, net revenue is the resulting amount after the cost of goods sold and deductions of sales discounts.
In other words:
In short, gross revenue is the earnings of a business before the deduction of expenses related to producing that good or service. Net revenue results from the cost of goods sold expenses have been deducted from gross revenue to calculate gross profit.
An example:
Here is an excellent gross versus net revenue example. A shoe business sells one hundred pairs of shoes at $50 a pair. Their gross revenue is $5,000. To calculate net revenue, the company should make deductions to account for the cost of goods sold, the cost of damaged items, discounts applied, and returned goods.
Consider gross sales minus returns, damaged items, etc.
Another big difference in the gross revenue definition is that the all-inclusive sum needs no further adjustments after calculating total sales, especially when accounting for revenue. For net revenue, a business should consider possibilities like returns when calculating net sales.
For instance, a store selling electronic gadgets sees a higher rate of return because of the product’s nature. The business should keep a particular amount of working capital on hand to handle the number of anticipated returns.
Is it Necessary to Understand Gross vs. Net Revenue Differences?
Understanding your business’s income statement and net and gross revenue is crucial for running a successful company as a small business owner.
Being involved in your financial performance and understanding financial statements can help you make intelligent decisions. For example, you’ll know when to raise sales revenue and when to cut operating expenses, overhead costs, and the cost of goods sold to increase the net profit margin.
Gross revenue doesn’t tell the whole picture.
A business’s gross revenue can indicate a company’s financial health, but it doesn’t tell the whole picture. When calculating net income, net revenue reporting offers a better and clearer picture and could tell a slightly different story.
Your gross income might seem high, but if you factor in how much you’re making after expenses, your net earnings could indicate that total revenue might be too low to cover your company’s expenses.
Raising your gross profit margin could mean reducing the direct costs of goods sold and other expenses. If you know where to look on your financial statement, net income will tell you if you need to generate sales or eliminate certain liabilities.
Revenue vs. Gross Income/Profit/Earnings vs. Net Income/Profit/Earnings (Bottom Line) in One Minute
What is the difference between gross revenue and net revenue?
In contrast, net revenue reveals how much of your gross revenue remains after accounting returns, refunds, and discounts. When your net revenue is close to your gross revenue, it may suggest that customers like your product enough to keep it. It also says that you don’t have to rely on steep discounts to move products.
What is net revenue?
Net revenue indicates how much money your company brought in after you account for all business expenses in the same period. You’ll report your business’s gross revenue on your income or cash flow statement as top-line revenue. It’s equal to your gross sales — the total amount your company took in over a certain period.
What is gross revenue in accounting?
Gross revenue, also known as gross sales or gross income, refers to the total amount of money a business earns from its primary activities before deducting any expenses. It is essentially the top line of a company’s income statement, reflecting the total revenue generated from the sale of goods or services.
What is the difference between net income and net revenue?
Your net revenue can ensure that you’re mostly profitable in transactions and that returns or deductions aren’t devouring profitability. Your net income, on the other hand, can show you your business’s true profitability. It can flag costs that need to be changed or signal that pricing needs to be altered.
