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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.
What is 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:
- Revenue is how much money your business takes in.
- Net profit is the amount you have left over after expenses.
Key Takeaway
Annual revenue is everything your company earns from sales activity during a given year before subtracting costs and business expenses.
How to calculate annual revenue
Your best method for determining annual revenue depends on the records you kept for the year and the type of income you receive:
- Using accounting software: If you use accounting software or a bookkeeping service, you can find your annual revenue on your financial statements or tax return, usually on the top line. It’s generally called “gross receipts or sales” or “sales and revenue.”
- Using sales logs: If you own a retail establishment or other business that makes many small sales daily, you should have a sales log that shows daily cash, check and card receipts. Add your daily sales to determine your revenue for the year.
- Using paid invoices: If you have fewer, large sales — for example, if you design websites or install new kitchens — look at your paid invoices for each client.
- Using bank deposits: Another way to calculate or double-check your annual revenue is to look at your bank deposits. Assuming you deposit all sales proceeds in the bank, your total deposits from business operations during the year equal your annual revenue if you use cash accounting, which most small businesses use. Be sure to deduct any deposits from sources other than revenue, such as loan proceeds or transfers from other accounts.
Did You Know?
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.
How gross annual revenue differs from net business income
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 |
|---|---|
| Salaries: | $200,000 |
| Third-party customer service call center: | $20,000 |
| Other annual expenses: | $12,000 |
| Total expenses: | $247,000 |
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.
Tip
Straightforward ways to cut business expenses include renegotiating insurance rates, reviewing vendor contracts and considering your office supply costs.
Operating revenue vs. nonoperating revenue
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
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
Nonoperating revenue is money your company earns from nonsales activity. This revenue category can include:
- Asset and capital sales: If you sell a machine you no longer use, the sales price is part of your annual nonoperating revenue.
- Dividend revenue: If your company invests in shares of another company, profits from this investment are dividend revenue and are nonoperating revenue.
- Interest revenue: If your company offers a loan with interest payments, carries a balance in an interest-bearing savings account or invests in the stock market, any interest income is nonoperating revenue.
- Rent income: If you rent property or lease equipment to another party, any income is included in nonoperating revenue, unless you’re in the rental business.
Track your revenue throughout the year
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.
Knowing your annual revenue helps put you in control
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.
