- 📅 December 27, 2022 📝 Last updated on February 9th, 2023 🕒 4 minutes Read time
Revenue is often used to measure a company’s level of success. If you’re thinking of launching a business, you’ve probably come across the terms gross revenue and net revenue during your research. But what do they mean, and how do you differentiate the two? In this article, we’ll explain everything you need to know about gross vs. net revenue.
What Is Gross Revenue?
First, let’s take a look at gross revenue’s meaning. Gross revenue (which you may have heard called “total revenue”) comprises the total amount your business earns from sales before deductions and expenses are accounted for.
You can calculate gross revenue by multiplying the number of units sold by the price per unit. So, let’s say your company sells 100 units of a product at $10 each. In that case, your gross revenue would be $1,000.
Why does it matter?
Gross revenue is going to be the top line of your business’s income statement, so it’s used to measure your company’s overall size and growth. This figure will help you understand how much revenue you are producing and your capacity to earn money. Investors are going to be very interested in this metric, as it reflects your business’s ability to increase sales year over year.
What Is Net Revenue?
So, now that you know about gross revenue, what is net revenue’s definition? Well, it takes into account the expenses that your company entails—as long as those expenses are directly related to revenue. Your net revenue is what’s left after those expenses. In the earlier example, we mentioned how a company’s gross revenue was $1,000. But if you had $400 in revenue-related costs, then your net profit is $600.
Why does it matter?
Remember how gross profit was the top line of an income statement? Well, net revenue is the bottom line—rather than measuring your ability to make sales, it measures your ability to generate profit. Investors will use this figure to assess your business’s financial performance and health.
See more: Net Income vs. Net Revenue
What About Gross vs. Net Profit?
We’ve examined net revenue vs. gross revenue, but revenue isn’t equivalent to profit. Net revenue may seem very similar, as it takes expenses into account and is used to measure your company’s profitability. However, there is a key difference between the two.
As mentioned above, net revenue only accounts for expenses that are directly related to the product or service you are selling; these include manufacturing costs, commission fees, raw material prices, direct labor wages, and so on.
But net profit takes it a step further and deducts the costs of insurance, utilities, maintenance, interest on debts, and so on. You can think of these expenses as indirect costs.
So, let’s revisit that earlier example. Your business has $1,000 in gross profit and $600 in net profit. But you also have to pay another $200 in payroll and insurance. Your net profit is $400.
Types of Expenses
In theory, these metrics should be simple to calculate. However, how do you know whether an expense is related to revenue or not? If you don’t have a firm grasp on that, you will have inconsistent calculations for net revenue and net profit. To help, here are some classifications of various business expenses.
|Non-Revenue Related Expense
|Office Space Rental
|Direct Labor Wages
|Direct Fuel Costs
|Currency Exchange Costs
Sample Income Sheet
Let’s look at an income sheet to see these figures in practice.
Income Statement for XYZ Company for Year Ending 31 December 2022
Gross Sales Revenue…..$2,500
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Net Revenue vs Gross Revenue FAQ
Net and gross are terms used to describe the amount of something, often in financial contexts.
Gross refers to the total amount before any deductions or adjustments have been made. For example, gross income refers to the total amount of money earned before taxes or other deductions are taken out.
Net, on the other hand, refers to the amount remaining after deductions or adjustments have been made. For example, net income refers to the amount of money an individual receives after all deductions, such as taxes and expenses, have been subtracted from their gross income.
So, in a nutshell, gross is the total amount, while net is the amount left over after deductions.
Revenue is generally considered to be a gross figure.
Revenue refers to the total amount of money received by a company from its sales of goods or services, before any deductions such as taxes or operating expenses are taken into account. The term “gross revenue” is sometimes used to emphasize that this is the total amount, without any deductions.
Net revenue is not the same as profit.
Net revenue is the total revenue received by a company after deducting any costs or expenses related to generating that revenue. It represents the amount of money that is left over after all the costs of doing business have been taken into account.
Profit, on the other hand, is the amount of money a company has left over after all its expenses, including both direct costs (such as the cost of goods sold) and indirect expenses (such as overhead and operating expenses), have been subtracted from its revenue. Profit is often considered to be the true measure of a company’s financial success.
So, while net revenue is an important metric for measuring a company’s financial performance, it is not the same as profit. To determine profit, additional expenses beyond the costs associated with generating revenue must also be taken into account.