LeoGlossary: Revenue
*Revenue is known by a number of different names depending upon what aspect of the business we are looking at. This is something that is important to owners, entrepreneurs, investors, and creditors.
In the financial markets, this is known as the top line. For public corporations that have to report, this is one of the main numbers that Wall Street follows to judge how the company is doing.
Accounting
Revenue is an accounting term. It appears on the income statement and is the starting point for all calculations.
This is why it is consider to be the top line number since it is first line for the period being looked at.
Another term for revenue could be sales. Whatever is used, revenue is the amount of money (and credit issued) brought in through the selling of goods or services. The amount collected might be different from the revenue since a company could recognize the business activity yet offer terms as a part of the sale.
Here is where we see cash flow diverging from revenue.
It tends to be the gross number in that nothing is subtracted from it. We are looking at the adding up of the prices of all products (or services sold).
From revenue, costs are deducted as the income statement is filled out. Here we start to see things such as net income and profit margins emerging. Investors also look at these metrics, especially the trends pertaining to them, to deem how a company is performing.
Types of Revenue
There are a number of types of revenue that accountants utilize which can help analysts and investors.
Operating revenue - income from the company’s primary source of revenue. This would be the normal operations of the entity.
Non-operating revenue - income derived outside the company's core business. The licensing of the company name or logo might be an example.
Accrued revenue (or deferred revenue) - This is revenue from a sale being made but payment has not been received. It could pertain to a trial period or some other promotion.
Unearned revenue - payment was made yet the customer has not received the product. This is often the case with technology companies, especially those dealing with software. Because only a percentage of the features are included, the company is forced to separate this out since it all cannot be realized.
Gross revenue - the total revenue generated by all income sources, including any discounts or returns, but not including expenses or taxes.
Net revenue (net income) - shows revenue after all expenses, cost of goods (COGS) sold, depreciation, interest, and taxes have been subtracted.
Formula
Revenue = # of Units Sold x Price Per Unit
Government Revenue
Governments are able to generate revenue but not in the same way as a business. Their main method is either through taxation or the charging of fees for services it provides.
Since most governments operate with a shortfall in revenues they engage in deficit spending. Here is where debt is used to make up for the gap in what is taken in versus what goes out.
This is common at national (or federal) levels. Provinces or states are typically required to operate a balanced budget.
Real Estate
When it comes to investing in real estate, revenue is usually income generated by the property. This can be parking, rent, or other fees charged for its use.
Vacant properties are not said to be generating income or revenue. Also, profits from speculation or asset appreciation is not considered revenue as it is a profit from selling the property.
Importance
Nothing happens until a sale is made.
This is an old business saying. Without revenue, a company does not have much of a future. Most efforts in business are done with the intention of increasing the revenues a company is able to generate. Through the sales and marketing efforts, an increase in business transactions means a company is experiencing growth.
Investors are intent on looking at a company's growth rate before buying the stock or putting up funds. Analysis often includes looking at what is happening with revenues throughout the industry. Is this one in decline?
Revenues are the starting point of an entity's success. While increasing revenues is no guarantee that a company will generate a profit, it is the way it does pay its bills.
It is why it gets so much attention from those either looking to make an investment such as financial institutions or those seeking to extend credit like banks.
