What is Revenue of a company?

Revenue also called as Sales, is the total income of a company generated by the sale of goods or services in a specific period, related to the company’s primary operations.

Revenue = Price of good or service * No. of units of goods or services sold.

So, it is income before deducting any expenses.

Calculation of Revenue of A company

For example, If a company ABC sells 10,000 ‘X’ items, 20,000 ‘Y’ item and 30,000 ‘Z’ items, where ‘X’ costs Rs.50, ‘Y’ costs Rs. 40 and ‘Z” costs Rs. 30, its Sales would be, 10,000*50 + 20,000*40 + 30,000*30 = Rs. 22 lacs. So, is company ABC doing good?

Only, Sales do not give a clear picture of the success of the company, we should see it along with expenses incurred for the same period. [Sales – expenses] gives you net profit, which actually talks about the success of the company.

So, if expenses of ABC in raw material, employee salaries, utility bills, rent, etc. are Rs. 15 lacs, its Net Profit would be Rs. 7 lacs. But is the same expenditure rises to let’s say Rs. 21 lacs, the same ‘ABC’ company won’t look same, right?

Revenue is called as Turnover also known as top line, as it is reported first on income statement. Companies report revenue for a quarter or a year. Investors and traders see the turnover and EPS (earnings per share = Net Profit /No. of shares) figures to analyze the financial health of a company.

Operating vs Non-Operating Revenue

Revenue here means Operating Revenue. There is another term called as Non-Operating Revenue.

• Operating revenue is the revenue generated by the core business of the company.
• Non-operating revenue are from other non-operating revenue sources, like the company may have a financing division which does investments, sale of certain assets, etc. Non-operating profits don’t have any guarantee and thus, could be occasional events.

different ways of calculating revenue

Based on the accounting method which a company employs, it calculates sales in different ways. 1. In Accrual accounting, goods and services delivered to the customer are termed as sales even when the money is yet not received i.e. the company gives product to its customer on credit. Therefore it is necessary to check the cash flow statement to assess how efficiently a company collects the money it is owed. 2. In Cash accounting, sale is termed as ‘revenue’ only if the company receives its payment. When the company receives cash, it is termed as receipt. Remember, not all receipts are termed as revenue. So, when a company receives an advance, the company will term it as receipt, but this is not revenue.

Example

Annual results of Colgate Palmolive (India) is shown here:

• Gross Sales = Gross Revenue = Top line of company’s income statement = 4,299.89 Cr
• Sales = Net Sales = Revenue = Net Revenue = Gross Revenue – Excise/Service Tax Therefore, Net Revenue ie. Revenue = 4,299.89 Cr – 140.45 Cr = 4,159.45 Cr. This is Net Operating Revenue on with the incurred Excise/Service Tax(GST).
• There is other Operating Revenue on which Excise/Service Tax(GST) is not incurred which is 28.53Cr.
• Thus, Total Operating Revenue= Operating Revenue with GST + Operating Revenue without GST = 4,159.45 Cr + 28.53 Cr = 4,187.98 Cr
• Non-Operating Revenue [other income] = 38.82 Cr
• Total Revenue = Total Operating Revenue + Non-operating Revenue Total Revenue = 4,187.98 Cr + 38.83 Cr = 4,226.80 Cr

Gross Sales for year ending Mar 2018 is 4,299.89 Cr which was 4,489.85 Cr in the year ending Mar 2017, which indicates, its Sales/ Top line has decreased compared to previous year. Still due to decrease in the Excise/Service Tax (GST), the Net Operating Revenue of the company has increased to 4,159.45 Cr from 3,951.47 Cr in the year ending Mar 2017.

Summary

• Sales or Turnover is the total amount of income generated by the sale of goods or services related to the company’s primary operations.
• Both revenue and net income are useful in determining the financial strength of a company, but they are not interchangeable.
• Revenue is also known as top line of a company’s income statement, as it is reported first on income statement.