What Is Annual Revenue? And How to Calculate It

Get a deeper understanding of your business’s performance by understanding the meaning of annual revenue. We break it down!

annual revenue

As a business owner, you need to track many financial metrics to evaluate your performance. These metrics include cash flows, profits, losses, annual business revenue, and more. But what if you aren’t sure what annual revenue means and how to calculate it?

Today, we explain the meaning of annual revenue and answer some frequently asked questions about this metric!

What does annual revenue mean?

Annual revenue is the total amount of money that a business earns from sales of products, services, assets, or capital over a year. Annual revenue does not include any costs and expenses. That’s why revenue is frequently indicated on income statements by the term “sales.”

Annual revenue also indicates the performance of products and services, specifically which products and services are performing well and which are not.

Types of annual revenue

There are two main types of revenue: operating and non-operating revenue.

Operating revenue

Operating revenue refers to the money your business generates from its main activities. Sales of goods and services are typical examples of operating revenue. For instance, the operating revenue of a software company is its number of sales or subscriptions. 

Non-operating revenue

Non-operating revenue refers to the money earned from a business’s side activities. Some common examples of non-operating revenue include: 

  • Interest revenue. This account records the money your business earned from investments such as debt securities.
  • Rent revenue. This type of non-operating revenue is the money you earn from renting out property or equipment to other parties. 
  • Dividend revenue. Dividend revenue is the profit your business earned from investing money with interest payments or investing funds in the stock market. 
  • Asset and capital sales. If you liquidate equipment you no longer use to another company, the sale price becomes part of your annual non-operating revenue.

Remember that it’s important to classify your types of revenue because each type is taxed differently. Failing to classify your business revenue can affect the business’s profit, performance, and financial position. So, business owners must understand and classify their revenue to file their taxes correctly. 

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Why is annual revenue important?

Businesses sell products or services to customers to make a profit or other return, so the amount of annual revenue indicates how well they’re performing.

Additionally, business owners use their annual revenue to pay employees and take care of other operating expenses. So, if the annual revenue falls short during a particular year, the business may be unable to pay all of its expenses, resulting in losses or bankruptcy. 

Moreover, comparing this year’s revenues to previous years can help business owners see whether they perform better or worse. This comparison metric can help businesses make immediate decisions about their strategy and find new ways to approach customers, since annual revenue is directly affected by customers’ satisfaction with the business’s products and services. 

How do you calculate a business’ annual revenue?

Calculating annual business revenue is relatively simple. Most accounting software will allow you to download an income statement that includes your annual revenue. However, it’s important to note that your financial statement is only accurate if you enter all accounting information into the software. 

On the other hand, if you calculate your annual revenue manually, simply follow this formula: Revenue = number of items sold x sales price.

For example, if you own a clothing store and sell T-shirts, jeans, and jackets. You price each T-shirt at $10, jeans at $20, and jackets at $30. Last year, you sold 200 T-shirts, 100 pairs of jeans, and 50 jackets. You don’t have any other sources of income and non-operating revenue. In this case, you will calculate the revenue of each product by multiplying the quantity you sold of each product by its price:

T-shirts: 200 x $10 = $2,000

Jeans: 100 x $20 = $2,000

Jackets: 50 x $30 = $1,500

Your total revenue was $2,000 for T-shirt sales, $2,000 for jeans sales, and $1,500 for jacket sales. Then, calculate your total annual business revenue by summing up the total revenue for each product: 

Your total annual revenue = $2,000 + $2,000 + $1,500 = $5,500

Remember that this simple formula applies before taking any expenses into account. You can calculate your profit by subtracting the expenses involved in manufacturing, delivery, and operating expenses, from your total revenue.

Is annual revenue different from net income?

The terms “revenue” and “net income” might sound interchangeable, but they are two different concepts. As we discussed above, annual revenue is the amount of money that a business generates before subtracting any expenses. Annual revenue only indicates how effective a company is at generating sales and revenue. And does not account for operating efficiencies, which could have a significant impact on the bottom line.

On the other hand, net income is the money left from annual revenue after subtracting operating expenses (e.g., payroll, raw materials, insurance, healthcare, taxes, and other expenses). Net income is also synonymous with “profit.” Business owners can then use net income to reinvest in the business or pay shareholders. Net income is also a financial metric to evaluate the health of a company and is used to describe how efficient a company is with its spending and managing its operating costs. 

Bonus: Annual recurring revenue explained

Annual recurring revenue is another common financial term. This type of revenue refers to the money that a business earns from multi-year agreements and is most common in service companies. For example, your business signs a three-year service agreement as a food supplier for a restaurant. That agreement brings a predictable amount of revenue from this client over the period of three years. Many businesses consider annual recurring revenue higher quality since it is money the company can theoretically count on in future periods.

The bottom line

Understanding your business’s annual revenue helps you determine if your company is profitable. From that, you can create a proper revenue management process for your business, which in turn helps your business better manage its sales tactics and costs and operate more efficiently in the long term. 

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