What is sales revenue? Ultimate guide on how to calculate it
Sales revenue is a key metric to monitor. Learn how to use the sales revenue formula so you can gauge your company’s continued viability and forecast more accurately.
Published September 26, 2022
Last updated October 19, 2022
Every journey begins with a single step. And nowadays, every sales journey starts with a single click. As sales reps guide their leads through the sales pipeline, they’re certain to have numbers on the brain: talk time, conversion rates, and quote-to-close ratios—all pointing to the company’s sales revenue.
But what is sales revenue, exactly, and why does everyone care about it so much?
In this article, we’ll unpack all you need to know about sales revenue. We’ll give you a comprehensive sales revenue definition, walk you through how to calculate it, and reveal why it matters so much for sales forecasting.
What is sales revenue?
Sales revenue is the income a business generates from the sale of goods or services. It’s recognized on the income statement for the month when the product is delivered or the service is fulfilled. Sales revenue is probably the most-cited and most pressing metric for organizations of all sizes. It’s foundational to calculating a company’s valuation and KPIs, forecasting, benchmarking growth, and making strategic decisions.
The two main components of sales revenue are gross revenue and net revenue.
Gross sales revenue includes the total amount of money a company receives from the sale of products or services.
Net sales revenue subtracts sales returns, production costs, and other expenses from the gross sales revenue figure.
While gross sales revenue is a good indicator of how well a business sells its offerings, it doesn’t necessarily reflect its profit margin. Net sales revenue offers a clearer picture of how much cash a company actually brings in.
What’s the difference between revenue and sales revenue?
Although the two terms are often used interchangeably, there’s a subtle but significant difference between them.
Revenue includes all income that a company generates. When revenue comes from outside the core business of selling goods or services, it’s considered non-operating income.
For example, income generated by interest on savings is considered revenue, but it’s not sales revenue.
Sales revenue, strictly speaking, is income that’s generated from the sale of a company’s products or services. While sales are always considered a revenue stream for any business, not all revenue comes from sales.
Why is sales revenue important?
Sales revenue is the top-line metric on a company’s income statement, emphasizing its importance as the foundation for determining net income. Net income is among the most crucial metrics a company has for gauging its viability and future, so businesses must calculate their sales revenue accurately.
Armed with this key metric, executives understand where their business is and where it can go. Sales revenue helps companies:
- Measure profitability
- Assess pricing strategies
- Plan operating expenses
- Define investments
- Formulate growth strategies
- Determine eligibility for loan or contract opportunities
- Analyze historical revenue trends
- Calculate valuation
What does sales revenue include?
Sales revenue includes the sale of all products and services, giving companies a clear picture of the profits gained from what they sell. Timing matters in the calculation, however, because a sale doesn’t necessarily count in real time.
Let’s say a music shop takes in two guitars, three violins, and an accordion for repair in August. The customers pay for their repairs upfront, and the lucky stringed-instrument owners have their pieces returned in the same month. But the accordion player needs to wait for a replacement part, so they receive their repaired instrument in September.
In this scenario, the repair services performed on the stringed instruments can be counted in the August books, but the accordion repair can’t—even though the customer paid for repairs in August. This deferred revenue is recognized when the accordion is delivered to the customer in the following month.
What doesn’t sales revenue include?
Sales revenue does not include the cost of goods sold (i.e., any costs associated with directly producing the goods, like materials or labor). It also doesn’t include income that’s not directly related to the core business.
For example, say our music shop allows a local guitar player to use the back room for lessons on Wednesday nights. Whatever this guitar teacher charges for lessons doesn’t count toward the music shop’s sales revenue because it’s not directly related to their core business of selling and repairing instruments.
Sales revenue also doesn’t include sales tax. When a customer makes a purchase, the company is acting as an agent for the local and state government. The sales tax that’s collected goes to the government, not the business, so it’s not part of the seller’s sales or revenues.
Is sales revenue an asset?
No, sales revenue is not considered an asset. For accounting purposes, sales revenue is recorded on a company’s income statement, not on the balance sheet with the company’s other assets. Rather than being an asset, revenue is used to invest in other assets that provide value for the company or to pay off liabilities or dividends to a company’s shareholders.
How to calculate sales revenue
A fairly simple equation will show you how to find sales revenue, though most accounting and sales reporting software solutions can generate it for you. We’ll break down the sales revenue equation for both product-based and service-based companies.
Sales revenue formula
Product-based companies can calculate sales revenue by multiplying the number of units sold by their average price:
Service-based companies can calculate sales revenue by multiplying the number of customers by the average price of services provided:
How often is sales revenue reported?
For sales revenue accounting, reports can be generated for any set interval. Companies typically report revenue monthly, quarterly, and/or annually. It’s worth noting that sales revenue streams can be calculated individually (i.e., for each revenue stream the business has). This can help executives get an overarching view of how every revenue stream contributes to the company’s overall revenue.
Sales revenue and the income statement
A company’s income statement reports its revenues and expenses, revealing its profit or loss over a given period. Sales revenue is the first line of the income statement, which is why it’s commonly known as a “top line” metric. It attains this visible spot because it’s the starting point for determining a company’s net income. To find the gross profit, deduct the cost of goods sold from the sales revenue.
Keep in mind that sales revenue is usually broken out from a company’s total revenue in the income statement. It can be further broken down into specific revenue streams. In any income statement, however, sales revenue is the anchor point to which other line items are proportional.
Income statements can be structured as single- or multi-step. A single-step income statement shows one category for income and one category for expenses. A multi-step income statement shows income and expenses organized under specific expense accounts.
Sales revenue and the balance sheet
While an income statement covers a set period, the balance sheet shows the company’s financial position—assets, liabilities, and equity—at a specific point. Sales revenue on a balance sheet relates to the company’s assets: sales generate revenue, and revenue increases assets.
Strategies for forecasting sales revenue
Sales forecasting is, without a doubt, an extremely complicated endeavor. It’s no wonder that most sales leaders find it nerve-wracking: Only 45 percent of sellers have high confidence in their organization’s forecasting accuracy. This skepticism is often a self-fulfilling prophecy, as sales leaders rely on intuition instead of hard data and evidence to fuel their forecasts.
While there are different qualitative and quantitative methods for forecasting future sales revenue, all models become more accurate when you have access to accurate historical and current sales revenue. Here are a few strategies you can implement to ensure your forecast is as accurate as possible.
Input accurate data
When you’re forecasting sales, the last thing you want is a garbage-in-garbage-out situation. But to input clean data, you need to be consistent and accurate when collecting data in the first place. After gathering your data at different stages of the sales cycle, it’s important to look for strange anomalies, like coding errors or sudden spikes and dips. Remove any data that doesn’t make sense.
Consider past trends
Use historical data to extrapolate future trends. Creating graphs of previous sales data can help you spot patterns. You can also review competitor reports and perform market research. Just know that if your sales environment is particularly volatile and prone to significant fluctuations, plotting trends will not be as useful.
Allow for flexibility
If there’s one constant in this world, it’s change. Be prepared to refine your forecast when you encounter developments in staffing, product line-ups, pricing adjustments, promotional periods, regulatory changes, supply chain issues, and customer churn.
Sales revenue example
Isobel runs a small business selling hand-poured candles and soaps out of a charming seaside storefront. Summer is usually Isobel’s top season, with lots of tourists coming through her doors and leaving with beautiful handmade souvenirs from their trip. In July, she sold 500 candles for $25 each and 1,000 bars of soap for $10 each. To calculate her sales revenue, we need to multiply the number of units Isobel sold by their average price:
(500 x $25) + (1,000 x $10) = $22,500
Isobel’s July sales revenue is $22,500. In August, her sales increased: She sold 750 candles and 1,500 bars of soap.
(750 x $25) + (1,500 x $10) = $33,750
September led to an expected slump as tourists headed back home for school and work obligations. That month, Isobel sold 200 candles and 300 bars of soap.
(200 x $25) + (300 x $10) = $8,000
For Q3 (July, August, and September), Isobel’s sales revenues total $64,250. Isobel can use this figure to measure how profitable her business is and formulate a growth strategy to increase sales.
By understanding her sales revenue, Isobel can decide if she needs to raise prices next summer, find ways to upsell to her current customer base, acquire new customers, or expand into online sales during the slow season.
Realize the value of sales revenue
Sales revenue is more than just a number. It’s a key indicator of your company’s health and longevity as well as a starting point for strategizing how you can grow that revenue.
See how software like Zendesk Sell can help you generate comprehensive sales reports so you have the knowledge and insights to take your business to new heights.