Business owners cannot overlook the importance of financial statements as they are the key to understanding the health of a company. This includes knowledge of cash flow, profit, loss, and revenue. One of the most important terms to know is the meaning of annual revenue, which is the income generated by the business within a year before any expenses.
What does annual revenue mean?
A business’s total annual revenue is the amount the company made within the span of the last 12 months, whether from the sale of products or services. Annual revenue is added to the top of the income statement, and it’s often referred to as the “top line.”
Many would ask how total annual revenue differs from profits, something every business owner wants to know. Annual revenue is the total from sales before any expenses get deducted. Once expenses get deducted from annual revenue, they turn into profit.
How to calculate annual revenue
The process of calculating annual revenue is a relatively simple one. As an owner, the information you need is found in the accounting software and has to get entered into a formula.
Annual revenue formula
To start, you need to know the prices of the items sold, the services offered, and the quantity. Once this information is in your hand, use the following annual revenue formula:
Annual Revenue = quantity of each product or service sold X sales price
The total is calculated easily enough, even if there are multiple prices for the items or services offered. Perform the formula above for each item or service and add the calculations together to generate business operations revenue.
To get to the annual revenue, include any other income, such as sales of assets the business earned over the year.
Annual revenue example
Let’s say your business sells different office furniture. To keep this simple, we’ll assume there are only three products:
- Desks: $200
- Chairs: $50
- Cabinets: $100
Let’s say the business sold 500 desks, 500 chairs, and 300 cabinets to complete the formula. The total for each product is:
- Desks: $200 x 500 = $100,000
- Chairs: $50 x 500 = $25,000
- Cabinets: $100 x 300 = $30,000
The next step is to add them all together:
$100,000 + $25,000 + $30,000 = $155,000
If there are no other sources of income, the total annual revenue is $155,000. But, of course, profits will be smaller since profits are calculated by subtracting total expenses.
Why is understanding the meaning of annual revenue important?
Although calculating annual revenue is the first step toward finding out a company’s profit, this information has other important uses. First, the annual revenue determines the taxes a company must pay at tax time.
Second, the annual revenue is a good guide for how well the business is doing. Comparing the current year to past years is the best way to see if the company is still on track, moving forward, or falling behind. Knowing this determines the decisions you, as the business owner, will make going forward.
Third, should there be a time you need to apply for a small business loan, the annual revenue is an intricate part of the process. The number, your credit score, and other factors will greatly impact whether a bank will approve the funds to allow the business to grow.
How do you calculate a business’ annual revenue?
There are two ways to think about a business’s annual revenue: the total money received for the goods or services it provides or the total amount the customer spends. These transactions come in two forms: immediate, such as when you go to a store or delayed with the company sending an invoice. Whether payment was received or not doesn’t matter; all of these transactions get reported as part of the annual revenue.
Calculating this number is simple for companies who keep up with their accounting information. The formula takes the total goods sold, or services rendered and multiplies it by the price. This is calculated within a 12-month period, either the fiscal year or the calendar year.
What’s the difference between annual revenue vs. profit?
This question pertains to two important pieces of data asked about the most. To get to the profit, you first need to get to the annual revenue. So, first, find out how much revenue the company has for the chosen 12-month period (fiscal vs. calendar year). Once that information is written down, expenses are deducted to get to the company’s overall profit.
Frequently asked questions about annual revenue
Also known as gross sales, annual revenue is the total generated income from sales. On the other hand, the net income is the total earnings or profits at the end of the year. Therefore, annual revenue and net income are not the same things. First, using the formula mentioned above, the annual revenue has to get calculated, and then expenses are subtracted. Then, with the equation fully complete, the business owner arrives at the net income, also an important piece of information. Click to learn more.
Annual business revenue is the total revenue for the company before any other dedication is done. Essentially, annual revenue calculates the total of everything sold or every service the company performs. Gross income, on the other hand, is the total revenue minus the cost of goods sold. This amount is still before the deduction of any other expenses and gets disclosed on the company’s tax return. Click to learn more.
The in-depth annual revenue meaning is the total money earned by the company within the chosen 12-month timeframe. It is calculated by totaling the number of goods sold or services performed multiplied by their price. The formula is completed with as many goods or services as the company has; there is no limit.
This number is very important for many reasons, such as tax purposes and understanding whether the company is growing or declining from the previous year. The annual revenue is also the first step toward calculating the rest of the data presented on financial statements, such as profit.
To learn more bookkeeping terms so you can accurately monitor the financial health of your company, check out our mammoth list of 45+bookkeeping resources!
Agata Kaczmarek has held a passion for writing since early childhood. A professional writer for many years, Agata specializes in writing articles and blogs focused on finance as someone who holds a Master’s Degree in Accounting and Finance.
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