Total Revenue

What is Total Revenue?

Total revenue (also referred to as gross revenue) is the total amount of money a company generates from its business activities before deducting expenses. It factors in all sources of income. In addition to the sale of goods and services, that includes interest, dividends, rent, and anything else.

Companies use total revenue to understand their financial health and operational scale. It serves as the starting point for a company’s financial statements and can indicate growth trends, market demand, and business viability.

However, it’s important to note that total revenue does not account for any costs related to generating that revenue, which is necessary to analyze profitability. That is where net revenue, which takes into account expenses and taxes, comes into play.

Synonyms

  • Gross income
  • Gross revenue

Importance of Total Revenue

Total revenue offers a snapshot of a company’s size and market position. By tracking changes in it over time, you can assess your business’s growth trends, market demand responsiveness, and the effectiveness of sales and marketing strategies. Consistent growth in total revenue is generally seen as a sign of a healthy, expanding business.

It’s also the starting point for detailed financial analysis. It’s crucial for calculating various financial ratios and metrics that assess a company’s profitability, efficiency, and growth potential. Analysts look at revenue trends to identify sustainable growth patterns and potential financial distress.

Investors and stakeholders use total revenue for the same reasons. High or growing revenue can attract investments and support higher company valuations. It influences investor confidence and can impact your company’s creditworthiness and access to capital.

Since it factors in all sources of income, it doesn’t give a direct and accurate picture of your core revenue-generating activities (for that, you’d look at sales revenue). Still, analyzing its components can provide insights into operational effectiveness. For instance, tracking gross revenue per product, service, or source can spotlight your business’s most and least successful revenue drivers.

Calculating Total Revenue

The total revenue calculation is a bit more involved than other revenue metrics. Let’s dive into the components, formula, and examples below:

Components of Total Revenue

Total revenue is not to be confused with sales revenue (a.k.a. gross sales), which is the top line on your income statement. Sales revenues only include the income you’ve earned from core business activities — think: software subscriptions, services rendered, product sales.

While gross sales will probably be the largest part of your total revenue, other income sources are included in the latter:

  • Interest or dividends earned on investments
  • Capital gains from asset sales
  • Rental income
  • Royalties received for intellectual property licensing (e.g., patents, copyrights)
  • Any other income earned through non-operational activities

In other words, calculating total revenue requires you to account for all your operating and non-operating revenue. While the sale of an asset or stock might not appear on the top line of your income statement, it’ll still affect the final “total revenue” figure.

Total Revenue Formula

Calculating total revenue requires a series of steps:

  1. Calculate sales revenue. Sales Revenue = Unit Price × Quantity Sold. If you have multiple products or services, repeat the calculation for each and sum up the results.
  2. Determine other operating revenues. This might include ads, channel partnerships, or commissions.
  3. Determine non-operating revenues. These are any income sources that don’t come from business activities. Capital gains, royalties, and interest income belong here.
  4. Add the results from steps 1-3. This gives you the total revenue for the period.

Example Total Revenue Calculation

To illustrate the concept, let’s look at a hypothetical scenario.

Say you run a software company that sells monthly subscriptions to its product. In October, you sold 500 subscriptions at $2,000 each. Additionally, you earned $25,000 through system integration partners and received $10,000 in dividends.

  1. Sales Revenue = $2,000 x 500 = $1,000,000
  2. System integration partners: $25,000
  3. Dividends: $10,000
  4. Total Revenue = $1,000,000 + $25,000 + $10,000 = $1,035,000

Therefore, your total revenue for October would be $1,035,000.

Factors Affecting Total Revenue

In addition to the components mentioned above, several internal and external factors can impact the numbers appearing on your revenue accounts.

  • Discounting
  • Promotional offers
  • Returns
  • Refunds
  • Allowances

When someone returns a defective product and you refund them, for instance, it isn’t an expense. Instead, you’ll debit the Sales Returns and Allowances account and credit the Accounts Receiveable or Cash account. Effectively, you’re reducing sales figures for that period.

On a macro level, there are always going to be economic, market, and consumer factors that can affect total revenue. Some of these include:

  • Price sensitivity
  • Demand for your product/service
  • Competition
  • Economic conditions
  • Your pricing strategy
  • Your partner ecosystem
  • Your supply chain or development resources
  • Changes in consumer behavior and preferences
  • Seasonality

Strategies for Increasing Total Revenue

To grow your business over time, you have to generate more revenue. While increasing gross sales requires you to sell more of your core product or service, there are countless other growth strategies that can boost total revenue:

  • Expand your product or service offerings
  • Open new sales channels (e.g., online, retail, value-added resellers)
  • Create and participate in affiliate programs
  • Enter new markets (local and/or global)
  • Create strategic partnerships with complementary businesses
  • Optimize pricing strategies for maximum profitability
  • Invest in marketing, advertising, and brand-building efforts
  • Improve the customer experience and retention rates
  • Acquire or invest in other companies
  • Upsell, cross-sell, or offer additional services to existing customers
  • Raise prices (but be careful about pricing sensitivity)

Really, there are millions of ways to increase your company’s total revenue, and this takes some creativity. For instance, well-known website tracking and optimization software Crazy Egg generates millions from its software and millions more from its software review blog.

Inside every article, the links to the software vendors they compare and review are actually affiliate links. This means every time a reader clicks and makes a purchase, Crazy Egg earns a commission.

Additional Considerations When Assessing Total Revenue

When you’re looking at total revenue, there are a few things to consider:

Recurring Revenue vs. Non-Recurring Revenue

Recurring revenue is revenue you expect to receive from the same customer at regular intervals in the future. It typically comes from subscriptions, service contracts, and other business models where customers pay on a regular basis (monthly, annually, etc.).

Non-recurring revenue refers to one-off payments, like those for retail/ecom sales, project-based work, or consulting.

When you consider total revenue for a period, you have to consider how that revenue is recognized. If you use accrual-basis accounting, the ASC 606 revenue recognition principle requires you to consider when revenue is actually earned, not just when it’s received.

In the case of recurring revenue, that means you’ll recognize a fraction of your total revenue each month, based on the length of your contract term, even if they pay you the whole amount upfront. For instance, a $1,200 annual subscription paid in January would result in $100 of revenue per month, according to the contract.

Total Revenue vs. Sales Revenue

Since total revenue includes all types of revenue flowing into your business, there will be months where it will be much higher or lower than your sales figures. If you regularly sell ~$100,000 worth of product per month but sell your office space for $500,000 to take your team remote, your total revenue will spike to $600,000 that month.

That isn’t necessarily representative of the health of your business or even its sustainability. For that reason, you’ll want to look at gross sales when you’re evaluating the success of a product, campaign, or GTM strategy.

Revenue vs. Profitability

Revenue doesn’t factor in cost of goods sold (COGS) or operating expenses. It’s simply the amount of money you’re pulling in from your sales and/or investments.

Profitability is a measure of how much money you have left over to reinvest in or distribute out of your company after handling all your costs of doing business.

You can have tons of revenue (and substantial revenue growth) without being a profitable business. In fact, many companies — Uber, Zillow, Square, the list goes on… — have operated at a loss for years to develop their products and capture market share. In fact, that’s why SaaS investors use the Rule Of 40.

That said, you definitely want to consider your company’s ability to keep the lights on. Looking at revenue is good for assessing the performance of a sales or marketing initiative, but it alone doesn’t speak to the overall health of your business.

People Also Ask

Is total revenue the same as net income?

No, total revenue and net income are not the same. Net income is a measure of the profitability of a company after all COGS, expenses, taxes, and interest have been deducted from its total revenue.

How does total revenue impact operational decisions?

Total revenue directly affects the amount of cash flow available for investments, expansions, and other initiatives. Higher total revenue can also signal strong customer demand and offer pricing flexibility. A drop in revenue, however, may call for cost-cutting measures or operational changes to boost profits.

What are common mistakes when calculating total revenue?

One common mistake when calculating total revenue is not considering revenue recognition. Especially if you’re working with subscription services or long contracts with multiple milestones, it’s important to recognize revenue based on when it is actually earned, rather than when you receive payment.