You can use the total revenue equation to calculate revenue for both products and services. To make it easy to remember, just think “quantity times price.”
A company’s revenue is the sum of money it earns by charging a certain price for its products or services. It is the starting point of a company’s income statement that establishes how much net income it generates following deduction of costs, taxes, and interest. It is one of the most crucial line items for a business as a result.
Despite the fact that it may only be one number, there are numerous perspectives on it. Businesses, analysts, and investors can benefit from these various levels of insight. Two of the most popular types of revenue are total revenue and marginal revenue. Marginal revenue is the additional revenue generated by selling one more unit of a good or service, as opposed to total revenue, which is the total amount of money a business makes (sales multiplied by the prices of goods and services).
Total revenue and elasticity | Elasticity | Microeconomics | Khan Academy
Why is total revenue important in business?
A business can only be profitable if its revenue outpaces its costs. Thus, the relationship between revenue and costs must be taken into account when making any business decisions. Total revenue is used by decision-makers to determine key pricing factors for their goods and services. For instance, a company may try to address the issue by reducing costs or raising prices if total revenue exceeds total expenses.
Additionally, businesses use total revenue to decide whether or not to continue operating. If total revenue consistently falls short of costs, a business may not be able to sustain itself.
When do you use the total revenue formula?
To determine the total revenue for a given time period, businesses use the total revenue formula. Total revenue, also known as gross revenue, is the sum of all a company’s earnings from the sale of its products or services during a given reporting period. The total revenue also includes all of the interests and dividends that a company has accrued during that time.
Although the terms “gross sales” and “total revenue,” which are two different measures of income, are occasionally used interchangeably Total revenue is equal to gross sales plus interest and dividends earned, whereas gross sales include all sales of goods or services made during a reporting period.
Before determining the marginal revenue, businesses must first know the total revenue for the reporting period. Marginal revenue shows how revenue increases per each additional sale. Before you can calculate a company’s net income, you’ll also need to figure out the total revenue for a reporting period.
The profit an organization made during a reporting period is known as net income, and it is calculated by deducting all costs from the total revenue. If you want to determine your company’s gross margin or financial ratios like the gross margin percentage, total revenue is also a crucial metric.
How to calculate total revenue
Simply multiply the number of products you sold by the typical price per unit sold over a certain period of time to determine your company’s total revenue. If your business is service-based, you must multiply the total number of clients by the typical cost of those services.
You can use the step-by-step instructions below to determine the total revenue for a reporting period:
1. Determine the number of units sold
The first thing you should do is figure out how many units you’ve sold. However, if you run a service-based business, you must figure out how many customers you served over a specific time frame. Depending on how you manage your inventory, service contracts, and clients, you may find this information in a spreadsheet, inventory or client management software, or an accounting package.
2. Determine average selling prices
The following step is to calculate the typical cost per unit sold or service provided. For instance, you can easily divide the gross sales by the number of units sold to determine the average price per unit sold.
3. Use the relevant total revenue formula
Once you have all the necessary information, one of two formulas can be used to determine the total revenue. Use the following formula if your business involves the sale of products:
If your company is service-based, you can use this formula:
4. Add nonoperating income
You must remember to include this non-operating revenue in your calculation of sales revenue if your company also receives dividends or interest from investments. This will display the total income made over the course of time.
Example using the total revenue formula
Here’s an illustration of how you can use the total revenue formula to guide your company’s decision-making:
Concerned about declining sales, the owner of Trendy Shoes intends to lower the price of every pair of shoes in order to attract more buyers. He sold 50 pairs of shoes in the last month, with an average selling price of $100 per pair, which he factored into the formula for total revenue:
$5,000 = 50 x $100
He has made the decision to offer all shoes at a 20% discount in order to draw in more customers and broaden his clientele. As a result, a pair of shoes will typically sell for around $80. He uses the following calculation to determine how many pairs of shoes he needs to sell to continue making the same amount of money as the previous month:
$5,000 = number of units x $80
He divides $5,000 by $80 to get the amount of units he needs to sell, which is 62. 5. This indicates that in order to match the total revenue from the prior month, he will need to sell about 63 pairs of shoes. It might be wise to carry out that plan if he conducts market research and determines that reducing the cost of his shoes will probably result in an increase in sales.
Even if his total revenue stays the same, he will hopefully attract more customers who he can try to keep by providing superior service. Additionally, by adding their information to his client database, he can attempt to forge new connections by informing them of upcoming sales and incentives.
What is the formula for total revenue in economics?
Technically, the price of the good (p) is multiplied by the quantity produced and sold (q) to determine revenue. Revenue (R) is defined algebraically as R = p q. Total revenue (TR) is the total of all a company’s sales of all goods and services.