Much goes into determining a business’ financial health. However, knowing how much money you’re bringing in from the goods and services you sell is an excellent place to start. Without knowing annual revenue, you won’t know if your business is growing or stagnant, and you won’t be able to calculate whether it has healthy profit margins.
Here’s a look at what entrepreneurs and business owners should know about calculating their annual revenue.
Annual revenue is the amount of money a company makes during a given 12-month period from the sale of products and services. Annual revenue is total sales before any deductions for the cost of the inventory you sold or business expenses. Annual revenue is often referred to as “sales” on income statements (also called profit and loss statements) or “gross receipts or sales” on your business tax form (Schedule C if you’re a sole proprietor).
The difference between revenue and net profit is crucial:
Your best method for determining annual revenue depends on the records you kept for the year and the type of income you receive:
Cash and accrual accounting differ. If your business operates on a cash basis, you count annual revenue in the year you receive it. On an accrual basis, you count annual revenue in the year you earn it, even if you haven’t yet been paid.
When you want to know how profitable your business is, your annual revenue is only half the equation. You must know how much money you have left over after expenses.
For example, say you sell project management software and your gross annual revenue is $275,000. You’ll examine expenses next:
|Maintenance of software’s back end:||$15,000|
|Third-party customer service call center:||$20,000|
|Other annual expenses:||$12,000|
Knowing gross annual revenue and how it changes from year to year tells you how your business is growing.
However, to run a profitable business, you must pay as much attention to your expenses as to net business income. Otherwise, a business can earn more and more money but have little or no net income left over. Net business income can be negative if your operations cost you more than earnings. A company with costs that consistently exceed revenue is likely to fail.
In addition to your gross annual revenue from your primary business, known as “operating revenue,” you should know your annual revenue from other sources, known as “nonoperating revenue.”
Operating revenue is the money your company makes from its primary activity, such as sales. In the project management software example, all software sales qualify as operating revenue.
Nonoperating revenue is money your company earns from nonsales activity. This revenue category can include:
To make sound business decisions and meet your estimated tax obligations, you must ascertain your business’ financial health more than once a year. If you run a one-person business, estimating your gross revenue and net income quarterly may be all you need to stay on track.
If you have a larger business with employees, you should manage your business’ finances more intently. You should know how much money your business is bringing in at least monthly. Knowing how your revenue is changing — and whether your business is making a net profit — is essential to making the best decisions for your business throughout the year.
Today’s business environment is complex, and you must make decisions to adapt and grow quickly to survive. Knowing your gross revenue and net income amounts — and what they say about your organization — is an essential first step to taking control of your company and reaching your business and financial goals.
Max Freedman contributed to the reporting and writing of this article.