In Finance, Gross revenue refers to all sales and income derived from selling products or services as well as any other related revenues, such as interest or investment income. Net revenue, on the other hand, is the amount of money remaining after all the costs of a company have been deducted.
The Difference Between Gross Revenue & Net Revenue
The difference between gross revenue and net revenue is the difference between factoring in all the money that a company makes versus including profit.
Gross revenue includes everything from sales to fees and costs, whereas net revenue includes only revenues that stay in the company or are reinvested into it. When reporting this data, be sure to include both numbers.
The goal of many companies is to increase their profits per year by increasing their gross revenues and decreasing their net revenue as much as possible, but this concept can be difficult to understand for those just beginning their career in finance or business management.
Most people understand that gross revenue and net revenue are different, but a lot of people find it difficult to grasp the difference between the two or how to account for them.
Gross Revenue
Gross revenue is the total amount of money that a company receives from sales and other revenue sources. It's the amount of money that goes through the company, regardless of whether any profit is generated by it.
Gross revenue also includes properties and items that cost a company more than what they're sold for, such as items bought with credit cards.
Net Revenue
Net revenue is the money that stays in a company after all expenses have been paid for. It's the money that goes into profit, and it includes the cost of things like materials or supplies, insurance, salaries and wages, taxes and interest. It also includes any extra costs incurred as a result of sales like refunds.
Gross Versus Net Revenue: Why Is Reporting on a Gross Basis Bad for Cash Flow?
As a business owner, you may want to know how much money your company has brought in. But gross revenue isn’t the best way to estimate this in the short term. Your business is not bringing in that money initially; it’s just a prediction of how much it will be able to earn when all is said and done.
The reason this can be problematic for cash flow is that if your business isn’t quite meeting its sales goals, then you could end up delivering more products or services that you have the necessary cash to pay for.
Gross Revenue vs. Net Revenue Reporting: Illustration
When reporting gross revenue and net revenue, you can use examples from your specific industry to illustrate the numbers for an investor or your internal record keeping.
Some possible examples include:
- A company that sells computer hardware to customers pays a 50-dollar fee when the customer uses their credit card to purchase their product; this fee is included under gross revenue because the company doesn't receive any money from it.
- A company that sells software develops the software and then pays the licensing costs, which include maintenance and updates. These costs are also included in gross revenue.
- A company that buys property for less than it sells uses this difference to pay for the cost of depreciation of producing a product. This value is also included in gross revenue.
- A company that makes several products using different materials has to pay off all its materials, including packaging and shipping, before selling each product. These costs are counted toward gross revenue because they come from a source outside their products.
Measuring Gross Revenue vs Net Revenue
The easiest way to understand the difference between gross revenue and net revenue is that gross revenue refers to all business income before expenses are subtracted.
Net revenue is what's left over after expenses are deducted from sales.
For example: if a company makes $100 million in revenues in a year and has $50 million in expenses, then it has net revenues of $50 million. In accounting terms, net revenues is an income statement term used to represent operating cash flow for some time. It is the amount of money earned that remains after subtracting all expenses.
Gross Revenue vs. Net Revenue Reporting: The Bottom Line
Gross revenue and net revenue can look very similar on paper, but they represent two very different numbers.
Depending on the accounting methods of your company, you may be able to account for gross revenue and net revenue separately or together. You will likely see gross revenue and net revenues listed together in much of the financial reporting that you see from a company.
The key thing to remember is that gross revenues refer to all money coming into a company, whereas net revenue refers only to money that stays in or goes back into the company for use toward other projects or profit.
Conclusion
In conclusion, it's important to understand the difference between gross and net revenue reporting, especially for small businesses. Business owners can make more informed financial decisions by understanding how each is calculated.
