Part of running a business is understanding all the twists and turns that come with entrepreneurship.
This is especially important to ensure that you don’t experience any surprises when it’s time to file.
A key concept you need to keep in mind is the difference between gross revenue vs. net revenue.
Not sure where to start? Don’t worry, we’ve got you covered.
Let’s take a look at everything you need to know.
For those unfamiliar with general financial terms, the word ‘gross’ here refers to a total amount before any obligated deductions (such as taxes).
A company’s gross revenue is the amount they’ve accrued from all sources of income that the business is directly responsible for.
To clarify, this refers to providing goods and services to customers and not money accrued from investments. This means that you only use numbers from sales to determine this amount.
Conversely, this type of revenue reflects your gross income after deducting the required expenses.
For example, let’s assume that your company focuses on selling athletic apparel.
Throughout 2018, you sell $1 million worth of shoes to your customers. Additionally, though, you experienced a few extra expenses.
Some of your shoes were found to be defective. Although this was through no fault of your own (or your staff), you refunded the money to these customers. This amount was approximately $10,000.
You also provided $50,000 total in various discounts. These included first-time buyer discounts, senior discounts, etc.
So, although you made $1 million in sales, your net revenue was only $940,000 ($1,000,000-$50,000-$10,000).
Why Is It Important to Know?
If your company is looking for investors, they’re likely going to be interested in your business’s gross revenue. This number serves as a measurement of how efficient your company is at making sales.
On average, a company with a stellar gross revenue will be a prime target for those who are looking to financially contribute to a business, even if your net revenue isn’t quite as impressive.
Gross revenue is also a major contributing factor in whether you can secure a business loan with a comfortable interest rate.
Net revenue is still an important metric to keep an eye on, though, as it is the lifeblood of your business.
If you’re only bringing in a small amount of net revenue each year, it’s not likely that you’ll be able to scale your company in the near future.
This leaves you with the risk of getting outclassed by similar businesses in your industry as they grow to provide more/better services or services than you can.
Understanding The Difference Between Gross Revenue Vs. Net Revenue Can Seem Difficult
But it doesn’t have to be.
With the above information about gross revenue vs. net revenue in mind, you’ll be well on your way to avoiding any financial pitfalls in the future.
Want to learn more about what to do if you miss your goal? This article has plenty of useful info.