Knowing your annual revenue will help you determine if your company is profitable.
- Your annual revenue is the amount of money your company earns from sales over a year; it does not include costs and expenses.
- To calculate your annual revenue, you multiply the quantity of each product you sold by its sale price, and then add each product's annual sales to determine your gross annual revenue.
- Annual revenue includes operating revenue and non-operating revenue, which has several subtypes.
- This article is for small business owners who need to calculate their company's annual revenue.
A lot goes into determining the financial health of your business, but knowing how much money you are making off of the goods and products you sell is a good place to start. Without knowing how much money you are bringing in, you won't be able to tell whether your business is profitable. For a firm starting point from which to determine whether your company's sales are indeed exceeding its costs, you should calculate and analyze its annual revenue.
What is annual revenue?
Annual revenue is the total amount of money a company makes during a given 12-month period from the sale of products, services, assets or capital. Annual revenue does not account for any of your expenses. This is why the term "sales" is often used to signify revenue on income statements.
Importantly, revenue and profit are not the same. Profit is the difference between revenue and costs. Thus, when the term "annual revenue" is used for business purposes, it means gross annual revenue rather than net business income, which is the money that remains with your company after you subtract the costs of your sales.
Key takeaway: Annual revenue is all the money your company earns from sales activity during a given year before costs and expenses are subtracted.
How to calculate annual revenue
To calculate your annual revenue, you need to know the prices at which you've sold items and the quantity of each item you've sold. You can calculate your annual revenue with this formula:
Annual Revenue = Sales Price x Number of Items Sold
For example, let's say you sell project management software with an annual subscription price of $100. If you sell this software to 2,000 clients in one year, this is your annual revenue for the software:
$100 x 2,000 = $200,000
If you also sell a premium software tier for $150 to 500 clients during the same year, this is your annual revenue for that product:
$150 x 500 = $75,000
As such, your total annual revenue is $200,000 + $75,000 = $275,000. However, this number paints only a partial picture of your company's finances. [Looking for help tracking and analyzing your business finances? Check out our reviews of the best accounting software for 2021.]
TIP: To calculate your company's annual revenue, multiply the number of each product, service, or asset you've sold by its sales price, and then add these items together to get your total annual revenue.
How to distinguish net business income from gross annual revenue
In the project management software example, your company's gross annual revenue is $275,000. This number is not the amount of cash your company has on hand or awaiting payment from accounts receivable. To calculate this number, which is your net business income, you'll need to incorporate your sales costs into the above calculations.
Let's say your company spends $15,000 per year to maintain your project management software's back end – servers, information, cybersecurity, hosting and more. You also pay your four-person team (including yourself) a total of $200,000 in salaries, with another $20,000 spent per year on a third-party customer service call center. Your other annual expenses – including rent, utilities, and interest on business loans – total $12,000. This would be the equation for your net business income:
$275,000 - $15,000 - $200,000 - $20,000 - $12,000 = $28,000
As you can see from this example, a large gap can exist between gross annual revenue and net business income. In fact, net business income can be negative, meaning your operations cost you more than you earn from them. This situation requires immediate attention, as a company with costs that consistently exceed its revenue is likely to fail.
Did You Know: To distinguish your gross annual revenue from your net business income, subtract all your operating costs from your sales.
Types of revenue
In addition to your gross annual revenue, you may want to calculate your annual revenue for several sales categories. There are two primary revenue types: operating and non-operating revenue.
Operating revenue is the money your company makes from its primary activity (i.e., sales). In the project management software example, all sales of the two software tiers qualify as operating revenue.
Non-operating revenue is the money your company earns from non-sales activity. This revenue category can include:
Asset and capital sales. If you sell a machine you no longer use to another company, then the sale price is part of your annual non-operating revenue.
Dividend revenue. If your company invests in shares of another company, the profits you earn from this investment are dividend revenue that comprises part of your company's annual non-operating revenue.
Interest revenue. If your company offers a loan with interest payments or invests its cash in the stock market, the money you gain from these transactions is part of your company's annual non-operating revenue.
Rent income. If you rent property or equipment to another party, then the amount you receive from these rentals is part of your annual non-operating revenue.
- Contra revenue. Unlike the other non-operating revenue, contra revenue always has a negative value. That's because contra revenue reflects depreciation – invoices that go unpaid or inventory that goes unsold.
Whether you are calculating your annual revenue for operating or non-operating costs, the same principles hold true: You multiply sold items by their price, then subtract all costs involved to find your net business income. With careful calculation that adheres to the above principles and advice, you can get a meaningful picture of your business and potentially stay profitable for years to come.