Sales Revenue Definition
Sales Revenue refers to the income generated by any business entity by selling their goods or by providing their services during the normal course of its operations and it is reported annually, quarterly or monthly as the case may be in the Income statement / Profit & Loss Account of the business entity.
It is the very first line time available in the income statement. In the case of manufacturing companies, it is a calculation by multiplying the number of units sold or produced by the average sales price per unit of that item.
Sales Revenue Formula
For serviced based companies, revenue is expressed as a product of the number of customers served an average price of service which is represented as,
However, it is important to note that the revenue booked does not necessarily mean the entire revenue from sales has been received in cash. A certain portion of this revenue may be paid in cash, while the remaining portion may be purchased on credit, through terms such as accounts receivable.
Furthermore, the revenue can be broken down into gross and net revenue. Gross sales basically include all receipts and billings realized from the sale of goods or services but does not deduct any sales returns and allowances. On the other hand, net sales deduct all sales returns and allowances from gross sales.
Steps to Calculate Sales Revenue
The steps in the determination of revenue from sales (gross revenue for a manufacturing unit) are the following three steps:
- Step #1- Firstly let us determine the number of units manufactured and sold during a specific period, say annually.
- Step #2-Now, since the number of units produced drives by demand which forms the basis of the function for the price, let us assess the average sales price per unit.
- Step #3-Finally, the revenue is a calculation by multiplying the number of units sold (step 1) and the average sales price per unit (step 2).
Sales Revenue Examples
Let us consider the example of a tyre manufacturer which produced 25 million tyres across different vehicle segments in the year 20XX. Now throughout the entire year, the company sold 10 million tyres at an average price of $80, 10 million tyres at an average price of $125 and 5 million tyres at the average price of $200 across different vehicle segments. Determine the revenue for the company.
Sales = Number of units sold * Average sales price per unit
- Total Revenue = $3,050,000,000 or $3.05 billion
Let us assume that there is a mobile manufacturing company in which the monthly sales volume has increased from 1,500 to 6,500 during the 12 months ending in November 2018. The price function during each month is governed by the function (7000 – x) where ‘x’ is the number of mobiles sold during the month.
Please note that during the month of March 2018, the number of mobile sales volume stood at 2,900. Calculate sales in the month of March 2018 and November 2018.
Now based on the available information, the monthly revenue from sales can be calculated as below
- Monthly sales = x * (7000 – x)
- Monthly sales = 7000x – x2
The mobile sales stood at 2,900 units during the month of March 2018, then the total monthly sales in March 2018 can be calculated as,
- Monthly revenue March 2018 = 7,000 * 2,900 – (2,900)2
- Monthly revenue March 2018 = $11,890,000 or $11.89 million
Again the mobile sales went up to 6,500 unit during the month of November 2018, then the monthly sales November 2018 can be calculated as,
- Monthly revenue November 2018 = 7,000 * 6,500 – (6,500)2
- Monthly revenue November 2018 = $3,250,000 or $3.25 million
Relevance and Uses
Although profit might be the major focus of the smaller business entities, there is another financial term which is just as important. It is the measurement of sales which can provide actionable information about the business which is not captured by the profitability alone. One can extract the maximum benefits out of the business information by recognizing the importance of revenue measurement.
It helps in examining trends in sales over a period of time which enables the business owners to understand their business much better. Some of the benefits of tracking the revenue are like analysis of daily sales trend to understand if there is any particular pattern in customer behavior. Further, a business owner can also observe the monthly revenue from sales trend to establish a relationship between sales volume and seasonality. Finally, based on this revenue trend the management can take certain decisions to boost the production or support the sales price per unit by managing the sales volume according to the customer profile, seasonality etc.
This has been a guide to Sales Revenue, its definition, and its meaning. Here we discuss the formula to calculate Sales Revenue along with practical examples. You can learn more about financial analysis from the following articles –