What is Gross Revenue vs. Net Revenue?
Your business’s gross revenue is the total amount of money your company generates, sometimes referred to as gross sales. It is the top line item on your income statement. Net revenue is what’s left from gross sales minus returns, discounts, and refunds.
For instance, let’s say your sporting goods store sold $250,000 worth of inventory in the year. During the year, you ran sales and discounts totaling about 10%. In the same year, you also had about $15,000 in refunds. First, you subtract your sales discounts. Ten percent of $250,000 is $25,000. Now subtract the $15,000 in refunds.
Gross revenue = $250,000
Sales discounts = -$25,000
Refunds & returns = -$15,000
Net Revenue = $210,000
What is Net Revenue vs. Net Income?
Now that you know what new revenue is, let’s talk about net income. Net income is the bottom line of your income statement, and it’s the profit your company makes after deducting expenses and operating costs – every cent your company spends on business operations. Let’s look at how to find your net income, aka net profit.
Using the sporting goods store example from above, we know your net revenue is $210,000. Let’s start with finding the gross profit.
Gross Profit
Gross profit or gross income is how much money is left from net revenue after subtracting the cost of goods sold (COGS). Let’s continue with our sporting goods store example from above.
Imagine you spent $80,000 to acquire your $250,000 in sporting goods inventory. Now, you need to subtract that from your net revenue just like you subtracted sales costs from your gross revenue.
Gross revenue = $250,000
Sales discounts = -$25,000
Refunds & returns = -$15,000
Net Revenue = $210,000
Cost of goods sold = $80,000
Gross Profit = $130,000
At this point, you can find your gross margin, which helps you determine how efficiently you convert sales revenue into gross profit. The formula is:
(Total revenue – costs of goods sold)/total revenue.
In our example above, it would be:
($250,000-$80,000)/$250,000 =
$170,000/$250,000 =
0.68, which becomes a gross margin of 68%.
Net Income
Now it comes time to calculate the remaining operating expenses. Find your direct costs – rent, utilities, maintenance, employee compensation, etc. Let’s say your total overhead is $70,000. Once you subtract overhead, liabilities, and estimated taxes from your gross profit, you find your net income.
Example Income Statement
Taking all of the info from above and adding in estimated taxes, a sample income statement would look like this:
Gross revenue = $250,000
– Sales discounts = -$25,000
– Refunds & returns = -$15,000
Net Revenue = $210,000
– Cost of goods sold = $80,000
Gross Profit = $130,000
– Overhead = $70,000
– Tax liability = $10,000
Net Income = $50,000
Using a real-world example, Apple reported a top-line revenue (gross revenue) of $260 billion, which was a 2% decrease. However, Apple’s net income was $55.3 billion, which was a 7% increase. The company’s income increased despite a decrease in revenue from generating sales.
What is Net Profit Margin?
Your net profit margin is the percentage of profit you make on your revenue, and it’s the most important metric to determine your company’s profitability.
Once you know your gross revenue and net income, you can calculate your net margin. If we continue our example above, divide your net income by your gross revenue and convert it to a percentage.
Net margin: $50,000/$250,000 = 0.20 = 20%. In this case, your net margin is 20%. That means for every $1 in revenue the company makes, you make $0.20 in profit.
Frequently Asked Questions
Here are some of the most common questions about net income and revenue.
Is Net Revenue the same as Net Sales?
Yes, both terms refer to the amount of money your company brings after adjustments for returns, sales, allowances, and discounts. Both amounts are reported on financial statements.
How do I Calculate Net Revenue?
First, find your gross revenue or gross sales – the total amount of money your company brings in. Next, add all your sales discounts, returns, and refunds. Then subtract that total from your gross revenue. The remaining amount is your net revenue.
Gross revenue – (sales discounts+refunds+returns) = net revenue.
How do I Calculate Net Income?
Your net income or net profit is how much you make after subtracting all expenses from your revenue. Start at the top of your income statement, and find your gross revenue. Next, you need to account for all costs.
It’s a good idea to break down expenses into sales discounts, cost of goods sold, overhead, and other expenses. Breaking down your income statement like this helps you identify areas where you’re losing the most money.
Once you’ve accounted for every expense, including your taxes, subtract total expenses from total revenue to get your net income.
Net revenue – (cost of goods sold+total operating expenses+taxes) = net income.
Net Revenue vs. Net Income – The Bottom Line
Small business owners have a lot on their plates. It’s nice to have a quick summary of your finances to understand how you’re performing.
Even if you have an accounting department, you should be able to review their numbers for accuracy. Understanding your net revenue and net income are important factors for managing your business.
Your net revenue reporting gives you a solid understanding of your sales efficiency. Your net income tells you how much profit you make. Understanding both metrics is essential to assess your company and identify where you’re strong and where you can improve.
For example, suppose your net revenue reporting is significantly lower than your gross revenue reporting. In that case, you might look at what you can do to reduce allowances, such as discounts and refunds. If your net earnings are too low, you need to find ways to improve profitability.
