Understanding the difference between gross and net revenue is essential for every entrepreneur.
In order to run a successful business, you have to have an understanding of exactly how much money you have coming in and how much you have going out.
Focusing solely on top-line numbers without consideration of operating expenses often is a business killer.
It’s important for long-term success to focus on your company’s overall profitability and not just cash flow.
Sure, being able to generate a lot of revenue is impressive. But profits are what really matter.
Running at a net loss on a regular basis isn’t sustainable in the long run.
And being able to calculate and project gross profit margins is key to determining your rates and pricing your products and services.
Read Also: Freelance graphic design rates: How much should you charge?
It is also important to keep detailed and accurate financial records in order to accurately determine these metrics and understand your company’s profitability as a whole.
What is gross revenue?
Gross revenue is the total sum of all income generated from a business for a specific period of time, before expenses.
For instance, if a business brought in $100,000 in income between 2021-2022, but had $60,000 in expenses, its gross revenue would be $100,000.
The equation essentially looks like this:
(Sum of Total Income) = Gross Revenue
Types of income sources may include the following examples:
- Sale of goods
- Interest payments
- Rental income
- Payment for services rendered
- Commissions and affiliate sales
- Ad sales (or money earned from advertising)
It may also be important to note that gross revenue may sometimes be referred to as total revenue, top-line revenue (or just top line), total income, total sales, gross income figure or gross sales revenue.
What is net revenue?
Net revenue is the sum of all income generated from a business for a specific period of time after expenses.
For instance, if a business brought in $100,000 in income between 2021-2022, but had $60,000 in expenses, its net revenue would be $40,000.
Business expenses may include the following examples:
- Cost of goods sold (including production costs and raw materials)
- Wages, salaries or payment for labor (including independent contractors, bonuses and 401k matching)
- Office supplies
- Utility bills
- Insurance
- Bank fees
- Professional fees
- Rent or mortgage payments
- Advertising, marketing and promotion
- Depreciation of assets
- Travel
- Business-related meals
- Taxes*
*Note: While you can include taxes as an operating expense for projections and planning purposes, it is important to understand that they are not a tax-deductible expenses.
Read Also: How do freelancers pay taxes? Advice from a six-figure freelancer
The equation essentially looks like this:
(Sum of Total Income) – (Sum of Total Expenses) = Net Revenue
Net revenue may also be referred to as net income, bottom line, net sales, actual profit, net earnings, total profit, or even take-home pay if the business is owned by a solo entrepreneur or small business owner.
Does revenue mean gross or net?
It may also be important to note that sometimes you may see the word “revenue” being used as a standalone term, which can be confusing.
Generally speaking, revenue when not used with a qualifier like “net” or “gross” more often refers to gross income.
Revenue is defined by Webster as “the total income produced by a given source” and “the gross income returned by an investment”.
However, when in doubt, it’s always best to ask for clarification as the term may occasionally be used interchangeably.
What is profit margin?
Now that you know how to calculate gross revenue and net revenue, you may be interested to learn about how to calculate profit margins.
Profit margin is the percentage of sales that exceed your business expenses.
For example, if a business produces $100,000 in gross revenue and has $60,000 in expenses over a specified period of time, their profit margins would be 40%.
You can calculate profit margin using the following formula:
(Net Revenue/Gross Revenue) * 100 = Profit Margin
What is a good profit margin?
Now that you know how to calculate profit margins, you may find yourself asking: “What is a good profit margin?”
While there is no rule of thumb, generally speaking, the higher the profit margin, the better.
Truly, the sky’s the limit. Some companies are even capable of running at profit margins of 90% or more. However, this is typically not the norm.
Below is a breakdown of average net profit margins from a variety of popular industries as of January 2022:
- Advertising: 3%
- Apparel: 7%
- Banking: 31%
- Broadcasting: 10%
- Business and Consumer Services: 5%
- Brokerage/Investment Banking: 20%
- Computers/Peripherals: 19%
- Education: 7%
- Electronics: 7%
- Entertainment: 4%
- Financial Services: 32%
- Food Processing: 8%
- Healthcare Products: 13%
- Hotel/Gaming: -29%
- Investments/Asset Management: 25%
- Metals/Mining: 12%
- Real Estate: 15%
- Online Retail: 7%
- Retail (General): 3%
- Software: 29%
- Transportation: 6%
- General Utility: 10%
Hopefully, this article has provided some insight to a few key terms as they relate to your business as well as a few important financial metrics that will ultimately help you and your company succeed.
Read Also: Quitting my job without a plan: The best decision I ever made
Are you a new or aspiring entrepreneur? Are there any key terms that you’ve always found to be confusing? Let me know in the comments below and I may use your insight in an upcoming article.
And don’t forget to connect with me on social media.
