What small-business owners should know about revenue

In business, knowing your numbers is essential for separating guesswork from informed financial decisions. Revenue is one of the most important metrics to understand. After all, it’s recorded on the top line of your income statement. 

But understanding your company’s revenue isn’t always straightforward, and calculating it doesn’t always follow a one-size-fits-all model. Keep reading to learn more about business revenue and how to calculate it. 

What you’ll learn:

• Business revenue is a measurement of how much your company earns from selling goods or services, before costs and expenses are accounted for.

• It’s sometimes called the top line because revenue is recorded on the first line of an income statement.

• You can generally calculate revenue by multiplying the number of units your company sells by the price per unit.

• You can increase your business’s revenue by generating more sales through efforts like building brand loyalty, adding new products or services and setting an optimized pricing strategy.

Revenue, sometimes referred to as gross sales, is the total income your company generates over a set period of time from selling goods and/or services, before accounting for costs or expenses. It’s recorded on the first line of your company’s income statement—one of the main business financial statements—so it’s sometimes referred to as the top line.

If your business has top-line growth, that means its revenue is increasing. Revenue reflects how effective your company is at generating sales, but it doesn’t account for expenses. This means that while revenue plays an important role in understanding your business’s financial health, it doesn’t necessarily tell the full story until you consider costs and other metrics. Business revenue can help indicate certain factors, such as:

• The strength of your market position

• How well you can attract new customers

• The financial path your business is on

• Your business’s performance over time

Investors or lenders may request business revenue, in addition to other metrics, to help determine whether an organization is financially stable enough to receive funding or be extended credit. And knowing your business’s revenue can help you make informed decisions about:

• Where resources will deliver the greatest impact

• When to expand into new markets

• How your business’s budget can support hiring or marketing efforts

There are two main types of revenue: operating and non-operating. Take a closer look at each below.

Operating revenue refers to what your business earns from core business activities. It typically represents the day-to-day revenue your company generates from sales. Depending on your business’s industry, operating revenue can come from the sale of products or services, or a mix of both.

Non-operating revenue is what your business earns from activities outside of its primary operations. Non-operating revenue can include revenue from dividends, loan interest, asset sales or lawsuit settlements. This type of revenue tends to be less predictable than operating revenue.

In simple terms, revenue is the quantity of units sold multiplied by the selling price of each unit. However, you may calculate revenue differently, depending on the accounting method used and your business’s industry or model. In its most basic form, revenue can be expressed by the following formula:

Revenue = Quantity of units sold ✕ Selling price per unit

Here are a few examples of how revenue is calculated:

1. Suppose you own a sneaker company that sells 650 pairs of running sneakers each quarter for $95 per unit. 

The business’s revenue would be calculated like this:

$61,750 in quarterly revenue = 650 units sold ✕ $95 per unit

2. If you own an IT company that offers cybersecurity monitoring services, you’ll calculate revenue by multiplying the number of service contracts sold by the cost of each contract. In this example, your company charges $15,000 per year for a cybersecurity monitoring contract and has 120 accounts. 

This service-based business would calculate revenue like this:

$1,800,000 in annual revenue = 120 accounts ✕ $15,000 per account

3. Suppose you sell coffee from a small food truck. Each week, you sell 300 cups of coffee for $3 per cup. 

You’ll calculate revenue like this:

$900 in weekly revenue = 300 units sold ✕ $3 per unit

Revenue is the starting point—it shows how much your company generates from sales. Net profit, on the other hand, is the end point because it reflects the amount your company keeps after accounting for expenses, debts and other income streams. In general, increasing revenue leads to higher profits, as long as expenses are managed effectively.

But there’s a possibility your revenue can increase without your profit increasing. For example, if your costs rise too quickly as you generate additional revenue, you could be hurting your profit margin.

There are several strategies, starting with the ones below, that you can use to increase your company’s revenue and improve its profitability potential.

While building your book of business is important, repeat customers can drive revenue growth by providing a more consistent sales stream. You can encourage customer loyalty by:

• Launching a customer loyalty program

• Maintaining communication through social media or tailored email campaigns

• Providing opportunities for customers to offer feedback

• Creating special offers or personalized discounts for brand loyalists

Scaling efforts, like offering new products or services, can encourage revenue growth by attracting new customers and expanding into new markets. Consider which of your existing products or services performs well and develop complementary offerings to support them. Once you’ve launched your new product or service, you could package it with your bestselling products to potentially increase purchasing frequency. 

When adding new products or services, consider the costs associated with expansion to ensure your profits aren’t compromised by higher overhead or production expenses.

Review how you currently price your products or services to determine their profitability. You can also research your competitors when setting a new pricing strategy. For example, if your competitors are offering similar products at a higher price point, you might be able to raise your prices without reducing demand.

Revenue measures how much your company generates in sales over a period of time. A higher business revenue could indicate that your company has a strong market position and steady demand. A consistent increase in annual revenue could mean your company is moving in the right direction. Knowing your business’s revenue can inform decisions about where to best allocate resources and when it may be time to expand. 

If you’re considering ways to fuel your company’s revenue growth, you could get pre-approved for a Capital One Business credit card—with no impact to your credit scores.