Gross vs. Net Revenue

What is the difference between gross revenue and net revenue?

The difference between your gross and net revenue is equal to your company’s expenses. These include the direct costs of goods sold (costs that are directly allocable to particular units or product lines) as well as other variable expenses and fixed costs (overhead).

Gross revenue - Expenses = Net revenue

Here are some things that account for the difference between gross and net revenue:

• Cost of goods sold: This is the direct costs your company incurs to manufacture goods or purchase inventory.
• Marketing costs: These include the costs of advertising, web development, and other brand-building or marketing efforts.
• Office supplies: These are everything you use in the office, from paper clips to toilet paper.
• Rent and utilities: This means payments for facilities, electricity, water and related services.
• Employee compensation: This includes salaries, wages, commissions and employee retirement benefits.
• Taxes: Payroll taxes, excise taxes, sales tax and income tax are all deducted before you arrive at net income.
• Legal and administrative costs: Any fees paid to lawyers, accountants and other consultants come out of your net revenue.
• Technology: This includes costs for software and other subscriptions or licenses.

While interest payments are another item that you’ll deduct from your gross revenue to calculate your net revenue, dividend payments usually are not. Those payments are deducted later in your business’s accounting process, after you’ve calculated net revenue.

Gross revenue reporting

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 of time.

Gross revenue doesn’t really have a formula, but this is what it would look like:

Total sales over covered period = Gross revenue

Gross revenue is a relatively easy number to calculate and to report using small business accounting software – it’s just the total money that came into your business during the reporting period (in the form of sales, not capital contributions or loans).

This figure does not take into account any costs you incurred to produce the sales that generated that revenue.

Net revenue reporting

While still quite straightforward, net revenue is slightly more challenging to report because it involves a few more calculations. In accounting, your company’s net revenue is your bottom line – equal to your gross revenue for the reporting period minus all expenses you incurred over the same period.

Here’s the formula for net revenue:

Gross revenue - Cost of goods sold - Overhead - Other variable expenses = Net revenue

You’ll use this formula to calculate how much of your business’s gross income is left over after accounting for all of the company’s expenses. It reflects your company’s total profit over a particular period.

Gross vs. net revenue examples

Consider a retail clothing store that has $250,000 in sales over a particular quarter. That $250,000 is the company’s gross revenue for the quarter.

Beginning with gross revenue, the store’s owner or manager then subtracts the cost of goods sold (the amount the store paid to acquire inventory); the rent for the storefront; utility costs; compensation paid to store employees; expenses for office supplies; payroll, income, sales and excise tax; expenses for office supplies; interest expense for money borrowed to buy inventory; and all its other costs. The amount remaining after all of those items are deducted is the store’s net revenue.

[Related Read: Guide to Financial Management Health for Startup Businesses]

When to use gross vs. net revenue

Gross revenue is extremely helpful for tracking your sales volume and ensuring that your company’s market share is growing and that your salespeople are hitting their goals. However, it provides little insight into your company’s overall profitability.

Net revenue, on the other hand, is great for tracking your profitability and provides considerably more insight than simple gross revenue. But net income also has its limits. For example, as net income fluctuates, you can’t immediately tell why. Without looking at your gross revenue over the same period, you can’t tell whether your business’s net income is changing because of fluctuations in sales or expenses.

Gross vs. net revenue ratios

Gross and net revenue are both regularly used in ratios and other metrics to indicate a company’s financial strength and performance.

Gross profit ratio is one metric that provides key insights as to the profitability of your specific products or services. Also called gross profit margin, gross profit ratio is the percentage of gross sales of a particular product or service that is profit above the cost of producing that good.

Gross profit ÷ Net sales = Gross profit ratio

In this formula, net sales equals your gross sales minus returns minus the cost of goods sold.

Net profit margin, also called return on revenue, is another metric based on your company’s revenue – this time your net revenue.

(Revenue - Cost) ÷ Revenue = Net profit margin

In other words, your net profit margin is your business’s overall profitability, accounting for all fixed expenses and overhead.