Gross Revenue refers to the total income a business earns from its core operations before any deductions are made. It includes all sales of products or services, irrespective of returns, discounts, or expenses. Essentially, gross revenue represents the raw sales figure for a company during a specific period.
On the other hand, Net Revenue (often referred to as "Net Sales") is the amount of money a business retains after subtracting various costs and allowances from its gross revenue. These deductions typically include sales returns, discounts, allowances, and other operating expenses. Net revenue gives a more accurate picture of the company's actual income from its sales activities.
Why is it Important?
Understanding the distinction between gross and net revenue is crucial for tracking sales performance and financial health.
- Gross Revenue provides insight into the total market demand for a company's products or services and serves as a starting point for understanding its sales scale. However, it doesn’t reflect the impact of discounts, returns, or any operational inefficiencies.
- Net Revenue, on the other hand, offers a clearer view of a company's real earnings from its sales activities. It helps businesses understand how much money they are actually bringing in after accounting for factors that affect revenue, like customer returns or promotional discounts. Net revenue is also a more accurate indicator for profitability, as it more closely aligns with the funds available for covering operating costs and generating profit.
For example, if a business has high gross revenue but also significant returns or discounts, its net revenue could be much lower, signalling a need for better pricing strategies or customer retention efforts.
How to Calculate Gross and Net Revenue
To calculate both gross and net revenue, you follow these basic formulas:
- Gross Revenue is simply the total sales amount without any deductions:
𝐺𝑟𝑜𝑠𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠 𝐼𝑛𝑐𝑜𝑚𝑒 Gross Revenue = Total Sales Income
- Net Revenue is calculated by subtracting sales returns, allowances, and discounts from the gross revenue:
𝑁𝑒𝑡 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝐺𝑟𝑜𝑠𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝑅𝑒𝑓𝑢𝑛𝑑𝑠 − 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡𝑠 − 𝐴𝑙𝑙𝑜𝑤𝑎𝑛𝑐𝑒𝑠 Net Revenue = Gross Revenue − Refunds − Discounts − Allowances
For example, if a company has:
- Gross revenue of £500,000
- Refunds of £20,000
- Discounts of £10,000
- Allowances of £5,000
The net revenue would be:
𝑁𝑒𝑡 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 500,000 − 20,000 − 10,000 − 5,000 = 465,000 Net Revenue = 500,000 − 20,000 − 10,000 − 5,000 = 465,000
This means that after accounting for returns, discounts, and allowances, the company retains £465,000 in actual sales revenue.
How The Data Refinery Can Help
The Data Refinery seamlessly integrates with most ecommerce platforms including Shopify, Amazon, WooCommerce and many more. Once hooked up, the system generates KPI reports across many areas of the business including both Gross and Net Revenue to keep you on track of your businesses performance.
