How to Calculate Annual Revenue
Knowing your annual revenue will help you determine if your company is profitable.
- Your company’s yearly revenue is the sum it makes through sales over the course of a year, excluding costs and expenses.
- The quantity of each product you sold is multiplied by its sale price, and the sum of the yearly sales of each product yields your gross annual revenue.
- Operating revenue and non-operating revenue, which has various subtypes, are both included in annual revenue.
- This article is for owners of small businesses who must determine the annual income of their enterprise.
Although there are many factors that determine your company’s financial health, figuring out how much money you are generating from the items and products you offer is a smart place to start. You can’t determine whether your company is profitable if you don’t know how much money it is taking in. You should compute and examine your company’s annual revenue to have a solid foundation from which to assess if sales do, in fact, outpace costs.
What is annual revenue?
The entire amount of money a business brings in each year from the sale of goods, services, assets, or capital is known as annual revenue. Your annual income does not take any of your costs into consideration. Because of this, income statements frequently refer to revenue as “sales.”
The distinction between revenue and profit is crucial. The difference between income and costs is called profit. As a result, when the word “year revenue” is used in a business context, it refers to gross annual revenue rather than net business income, which is the money that remains with your company after deducting your sales-related expenses.
How to calculate annual revenue
You need to know the pricing at which you sold your products and how many of each you sold in order to determine your annual income. You may use the following calculation to determine your annual income:
Annual Revenue = Sales Price x Number of Items Sold
As an illustration, suppose you provide project management software for $100 per year as a subscription. This is your annual software income if you sell this programme to 2,000 customers in a year:
$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 a result, your total yearly income is $275,000 ($200,000 + $75,000). However, this figure just provides a portion of the financial picture for your business. [Need assistance monitoring and evaluating your company’s finances? View our evaluations of the top accounting programmes.
How to distinguish net business income from gross annual revenue
The gross yearly revenue of your business, in the project management software example, is $275,000. This figure does not represent the amount of cash that your business has on hand or that is due from accounts receivable. You must factor your sales expenses into the aforementioned calculations in order to arrive at this figure, which is your net business income.
Assume your business spends $15,000 annually on servers, data, cybersecurity, hosting, and other backend services for your project management software. You also pay your four-person team (you included) a total of $200,000 in salary, and you spend an additional $20,000 annually on a third-party contact center for customer support. Your other yearly costs total $12,000 and include rent, utilities, and interest on company loans. The calculation for your net business income might look like this:
$275,000 – $15,000 – $200,000 – $20,000 – $12,000 = $28,000
This illustration demonstrates that there might be a sizable discrepancy between gross yearly sales and net business income. In fact, your activities may actually cost you more money than they generate in net business profits. This scenario needs to be addressed right now since a business that continually incurs more expenses than it generates will probably collapse.
Types of revenue
You might wish to estimate your annual revenue for a number of sales categories in addition to your gross revenue. Operating and non-operating revenue are the two main sources of income.
Operating revenue
Operating revenue is the money your business brings in from its main business (i.e., sales). All sales of the two software tiers in the project management software example are considered operational revenue.
Non-operating revenue
Non-operating revenue is the money your company earns from non-sales activity. This revenue category can include:
Asset and capital sales.
The sale price of an equipment you no longer need to another business is included in your yearly non-operating income.
Dividend revenue.
Dividend revenue, which is a portion of your firm’s yearly non-operating income, is earned when your company invests in the stock of another company.
Interest revenue.
Your business’s yearly non-operating revenue includes any money you make from lending money with interest payments or investing your company’s funds in the stock market.
Rent income.
Your yearly non-operating revenue includes any money you get from renting out property or equipment to third parties.
Contra revenue.
Contra revenue never has a positive value, in contrast to the other non-operating revenue. This is so that contra revenue, which includes outstanding bills and unsold goods, can show depreciation.
The same concepts apply whether you are figuring out your yearly revenue for operational or non-operating costs: You multiply sold products by their price, then deduct all associated costs to obtain your net business income. You may acquire a meaningful image of your firm and perhaps continue to be lucrative for years to come with meticulous calculation that abides by the aforementioned guidelines and suggestions.
