You wake up in the morning and have the best idea of your life. For the first time in weeks (or years) you jump out of bed and you don’t even need that second cup of coffee. You are ready to get to work.
You pitch your idea, explaining how this concept will change the game in your industry and help solve you customers’ pain points.
You excitedly turn to your boss and hear: “But how does this make us money? What’s the expected revenue for this?”
Where’s that second cup of coffee? You need it now.
Even with the greatest ideas, you have to know how it can make your business revenue. It’s important to understand how that idea fits in your overall business landscape. Of course, we all want to best serve our customers, but we have to be successful to do that.
We are all familiar with the concept of revenue and, in particular, how to keep increasing it for our business. However, the different forms of revenue and how to calculate them is often less understood. This is especially true for how to calculate total revenue.
The term “revenue” is not one size fits all. For example, net revenue relates to all the revenue left over after the costs associated with attaining it are subtracted. In contrast, gross revenue concerns the revenue attained before the costs are subtracted.
So, then what happens when a business has multiple income sources? Do they simply have a net and gross revenue for each one? The simple answer is yes, but in order to get a complete picture of how the business is performing, you’ll want to identify the total revenue figure. Total revenue refers to the sum of all revenue attained before the costs of doing so are subtracted.
How to Calculate Total Revenue
To calculate total revenue, first find the average cost of each item or service sold. Then multiply that amount by the number of products or services sold. The product of this equation is the total revenue of one’s business.
Avg. Cost of Sale x # Sold = Total Revenue
Why Should You Know How to Calculate Total Revenue?
So, why bother making the distinction between these different forms of revenue? They each paint a part of a picture, and together form a clear image of the fiscal health of a business. For example, you can compare total revenue to total costs. The difference between the two is the business’s profit, and that is, of course, one of the most succinct measures of how well a business is functioning.
It also serves to forecast future sales at different times of the year, help business owners identify what changing the price of a good or service might do to the business, and how many sales would need to occur to maintain previous total revenue.
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Understanding the different forms of revenue and knowing how to calculate each is a critical tool to in the belt of any small business owner. With the knowledge supplied here, one can perform a health check on their business in just a few moments. You should do this routinely, as having an up-to-date grasp on these figures can inform future business decisions.
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