Revenue

Revenue is the total amount of income that a business generates during a specific period, such as a month or quarter.

Investors and analysts often use revenue to judge the size of a business. Growth in revenue is often used to measure a business’s progress, such as by comparing the revenue generated by a business in one quarter to a previous quarter’s revenue.

Revenue is often referred to as the “top line” or “gross sales” of a business. Unlike profit, which is commonly referred to as the “bottom line”, expenses are not deducted from total sales when  calculating a business’s revenue.

Below, we’ve explained what revenue is in more detail, as well as why revenue is an important metric for a business. We’ve also explained some of the risks of depending on revenue as the sole metric of a business’s growth, value and financial health.

What is Revenue?

Revenue is the total amount of income that a business generates. It’s typically measured over a specific time period, such as a week, month, quarter or year. Revenue is often referred to as the turnover of a business.

Businesses can generate by selling physical or virtual goods, by providing services or by selling assets. It’s also possible to produce revenue through other uses of assets, such as investments that generate cash flow or capital appreciation.

Most of the time, revenue is measured using the amount of cash or cash equivalents taken in by a business. Revenue is typically sorted into one of two types: operating revenue (revenue that’s generated from your core business activities) and non-operating revenue.

Some businesses generate revenue entirely from the sale of products and services. Others may earn revenue from more than one source, such as revenue from sales as well as revenue that’s generated from investment profits, dividends or rent.

Examples of Revenue

There are several different ways in which a business can generate revenue. Most of the time, businesses earn revenue from the following accounts:

• This is the most common type of revenue. Businesses can generate revenue by selling products and services. For example, a retail clothing business will generate the vast majority of its revenue by selling physical goods to customers.
• This type of revenue is earned from any investments a business makes. For example, if a business deposits its cash into a bank account and earns interest on this deposit, this is a form of interest revenue.
• This type of revenue is earned from the distribution of company earnings through stock. For example, if a business purchases stock in another business and is paid dividends, this is a form of dividend revenue.
• Asset sales. A business can generate revenue by selling its assets. For example, if a business sells a commercial property that it owns to a third party, the cash earned from the sale is a form of revenue.
• Rent revenue. This type of revenue is earned from a business renting property or other assets to customers. For example, if a business rents commercial real estate to a small business, the rental fees it receives are a form of rent revenue.

Why Revenue is Important

Revenue is one of the most important metrics for determining a business’s size, financial health and investment value.

Obviously, a business needs revenue in order to survive, operate and grow. Revenue is one of the most basic financial components of a business. Simply put, without revenue, it’s impossible for a business to survive over the long term.

Businesses that generate significant amounts of revenue can often gain an advantage over their competitors. For example, a business that generates more revenue than competing businesses might be able to acquire its competitors and gain a larger share of its target market.

More revenue can also allow a business to hire more skilled employees, purchase advertising in order to sustain growth and invest in developing new products and services for its customers.

The Weaknesses of Revenue

Revenue is an extremely important financial metric, both for business owners and for investors considering investing in a particular business. However, it’s not the only metric that you should pay attention to when analysing a business’s performance.

First, revenue only measures the total amount of money that a business generates. It’s not the bottom line of a business. It’s possible for a business to generate huge amounts of revenue but not generate any profit if it has significant expenses.

Revenue alone also doesn’t measure the future growth of a business. If a company generates a lot of revenue but has a shrinking market share, it may not perform as well over the long term as other businesses in the same industry.

Ultimately, revenue is important. However, it’s also important to look at financial metrics such as profit, return on capital employed (ROCE) and cash flow when you’re analysing a business.

Summary

Revenue is essential for any business. Without any revenue, it’s impossible for a business to purchase inventory and equipment, hire employees, advertise to its customers and sustain its operations.

As a financial metric, revenue is extremely important. Used along with other metrics, such as profit, cash flow and return on capital employed, paying attention to a business’s revenue can help you identify good investment opportunities and maximise your total return.