What is Annual Revenue? Quick Explanation
Managing accounts and balancing the books are essential business owner tasks, and there are many accounting terms they have to familiarize themselves with. One of the most significant is annual revenue. In this guide, we’ll talk about what yearly revenue is, why it’s critical for business owners to understand, and discuss annual revenue vs. profit. We’ll also provide advice about calculating this section of your business finances.
What Is Annual Revenue?
Annual revenue is a financial term used to describe the amount of money a business earns, often in sales, during a fiscal year. Revenues takings only - they do not deduct business expenses. Knowing their expected and achieved annual business revenue enables company owners to monitor income before costs and track progress over time. Changes in yearly revenue are one of the primary indicators of business health.
For example, the annual revenue on your tax return is the income generated by product or service sales, as well as business-owned assets. Gross annual revenue is different from net annual income, which is what your earnings amount to once costs - e.g., supply, payroll, and damage costs - have been deducted from the total. The annual revenue abbreviation can be GAR (gross annual revenue) or ARR (annual recurring revenue).
Is Annual Revenue the Same as Sales?
Although annual revenue and sales are sometimes used interchangeably when discussing company accounting, the meaning of annual revenue goes beyond just sales, as it includes all forms of income a business reaps, such as capital donations, funding, etc. For example, if a company rents out a part of its owned premises, the proceeds will not be recorded as sales profits, but will be included in annual revenue.
How To Find Annual Revenue for a Company
To calculate your annual revenue, you need to multiply the price at which you sold products or services by the quantities of each product or service sold. That gives us the following revenue formula:
Annual Revenue = Sales Price X Number of Products Sold
Simply put, if your business priced a product at $100 and you sold 2,000 of those products during the year, your annual revenue from that would be $200,000.
However, multiplying your yearly sales by their prices is just the beginning of your accounting process. Next, you’ll subtract all the expenses your business has had in the same timeframe - that will get you the total of your annual profits.
Calculating Your Net Income
If we continue with the example described above, your annual revenue is $200,000. However, your business spends $10,000 per year on developing products and another $50,000 on wages. Additional business expenses, including the business taxes you’ve filed, rent, and utilities, cost a further $10,000. You can now calculate your net income, as follows:
Annual Revenue - Expenses = Net Annual Income
The figure would be $200,000 - $10,000 - $50,000 - $10,000, which amounts to $130,000. This is a pretty decent yearly profit, especially for a small-business owner. On the other hand, if your expenses exceeded your revenue, your net income would have been negative, indicating you’re losing money, even if you had a year-over-year increase in your gross revenue.
Understanding Different Types of Revenue
There are two main types of revenue for business owners and accountants to consider. These include operating revenue and non-operating revenue.
Operating revenue is business income from the business's primary activities, e.g., sales of products and services. Non-operating revenue is income that a company generates from additional streams. Examples include:
- Asset and capital: For example, profits from selling old business equipment or machinery, office space, etc.
- Dividends: If a company invests in another business, the revenue they generate this way is classed as non-operating revenue.
- Interest: If the company lends money, or has a savings account, the money earned through interest is recorded as non-operating revenue.
- Rent: This is income generated through renting out business premises or equipment.
- Contra-revenue: Contra-revenue is a negative number covering unsold inventory or unpaid invoices.
Annual revenue is not the same as income. Yearly revenue is gross, not net, and covers income through sales, capital and assets, and all other sources, but does not deduct business expenses from that figure. Business income takes costs into account, and growing annual revenue can still result in negative net income, depending on how expensive running your business is.
To calculate one year’s revenue for your business, you will need to multiply the number of products sold by their prices for that period. For instance, if you sold 10,000 products for $10 per piece, your annual revenue for that product would be $100,000.
Sales and annual revenue are often used interchangeably, but there is a crucial difference. Annual revenue includes all your business income, and is a broader term than sales. Revenue includes income from capital and asset sales, rent, investments, and interest, for example. Gross sales only cover the total amount of money earned through sales of products and services. In other words, gross sales are one component of a company’s annual revenue.
Taxes represent revenue for the government, and companies and organizations pay taxes and subtract them from their revenue. Governments use the term “revenue” to cover their income from taxes, fees, public services, and fines. Businesses use the term revenue to describe income from sales of products and services, capital and assets, and other types of non-operating revenue.
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