In business, it is very important to track the total revenue generated through the sale of goods & services. For any company, whether you’re selling products, services, or both, it’s critical to understand and see at a glance how your business is performing via Total Revenue. Total Revenue is a key performance indicator for all businesses, but particularly for start-ups, as it allows entrepreneurs to see exactly how much money their company has generated before any costs are factored in.
This article will be very beneficial for you, as we will cover What is total revenue with examples, how you can calculate Total Revenue with the help of the total revenue formula, why total revenue is important, factors that affect total revenue, and common mistakes that people usually make while calculating total revenue.
Understand Total revenue
Total revenue is one of the most important financial metrics as it indicates the total income generated by a business from sales of its goods & services. It is recorded before deducting any expenses. It represents the gross income of a business from its primary operations.
Sometimes people get confused between total revenue(sales) and income(profit). Total revenue is the total income generated by sales of goods and services. When we subtract the expenses from the income then we get the profit.
Total Revenue Formula
Businesses use this formula to calculate the total revenue
Total Revenue = Price × Quantity Sold
Now lets discuss each component of the mentioned formula
Price: It represents the Selling price per unit of the products.
Quantity sold: It shows the total number of items sold by a business.
Assume there is a company that sells 2000 units of a product that cost $50.00 each then the total revenue is $100000 using the formula above.
How to Calculate Total Revenue
Below are the steps involved in calculating the total revenue
- Determine the Selling Price of the Product: The first step is to identify the per unit cost of the product or services sold by a company.
- Find the Quantity Sold: After determining per unit cost of a product second step isto find the total amount of all items or services sold.
- Multiply Price by Quantity: To calculate your total revenue, simply multiply the price of each unit sold by the number of units sold
Total Revenue Examples
- Example 1: Suppose a store sells 500 shoes at the selling price of $60 each. Than according to the total revenue formula there total revenue would be $30,000. It is an example that represents a retail business.
- Example 2: Suppose you are the owner of a consultancy firm that charges a consultant fee of $120 per hour for 30 hours. Then your Total Revenue would be upto $3,600. This is a perfect example of a service-based business
- Example 3: Suppose you are a subscription based company and you have a user base of 1,000 people paying $25 per month. Then your total revenue would be Monthly Revenue: $25,000 and Annual Revenue: $300,000
Above mentioned example is related to subscription based business.
Why Total Revenue is Important?
Some of the important factors that make the total revenue so much important are.
- Measures Overall Business Performance
It is an important indicator of the overall financial performance and operational success of the business. - Helps Determine Effective Pricing Strategies
It also helps businesses to analyze whether their pricing strategy is working properly by attracting customers and increasing sales income. - Used for Sales Forecasting and Budgeting
Total revenue data is very critical as it is used by businesses to accurately forecast sales. It is also useful in budget planning by setting realistic business budgets. - Evaluated by Investors and Lenders
Total revenue plays important role in attracting investors and lenders. Investors and lenders rely on total revenue to assess business stability, investment risk and potential to generate profit and loss statements. - Indicates Market Demand and Growth Potential
Total revenue is very useful to understand the market optics. Increasing total revenue indicates the strong market demand for your product. It also highlights opportunities for business growth and expansion.
Strategies that Businesses Use to Increase Total Revenue
Businesses need to increase their revenue over time to grow their business. Businesses are required to sell more of their products & services to increase revenue. There are some strategies that can increase the total revenue of a business.
- Businesses adjust their pricing models to increase their total revenue.
- Search and expand business in new markets.
- Businesses need to provide a better experience to retain their customers.
- Businesses need to diversify the range of their product and services.
- Need to implement sales techniques like upselling and cross selling in the business to increase revenue.
- Increase the product prices (be careful about price sensitivity).
Factors that Affect Total Revenue
In addition to the above mentioned components, there are some of the other factors that affect the total revenue of a business.
- The current pricing strategy is followed by the businesses.
- Total sales volume of the business.
- Total consumer demand for the product in the market.
- Competition in the market for the specific product.
- Discounts & promotions for the specific product.
Mistakes to Avoid When Calculating Total Revenue
Some of the common mistakes made by people in calculating the total revenue are
- Neglecting Discounts & Returns: sometime peoples fails to deduct the customer returns, refunds and promotional discounts which increases the total revenue figure.
- Revenue and Profit Confusion: People usually get confused between revenue and profit. Revenue is the total money earned by a business while profit refers to the total money left after subtracting the expenses.
- Using Net Prices: Using net prices instead of gross prices leads to irregularities.
- Miscounting Units Sold: Incorrect counting of the total unit solds leads to anomalies.
Avoid these common mistakes when calculating total revenue to get accurate results.
Conclusion
Total revenue is one of the core fundamental metrics that provides a clear view for business owners about their business’s financial health. It also helps them in decision making by identifying the growth opportunities. In simple words, consider that total revenue is a fuel for businesses, and without it businesses cannot move forward. We hope our comprehensive article will help you understand what is total revenue, how you can calculate it. For more accounting related concepts please check out our other articles.