Whatever income you make from your business sales falls under gross or net revenue, but both of them are distant from each other. As a small business owner, you need to track both to ascertain the financial position of your business. Knowing gross revenue vs net revenue helps you to understand that how well you are handling your expenses and how well your business is generating profit. Note that there are also income tax implications if they are not handled correctly. Have a quick read if you want to know the difference between gross revenue vs net revenue and why it is important to understand them. Let’s have a look!
Gross Revenue vs Net Revenue: Differences
In simple words, gross revenue or income is the earnings you made from your sales without taking into account any expenses that have been used or will be used. It indicates the ability of businesses to sell their goods and services, not the ability to make a profit. In addition, it is not only the income earned from the sales of goods and services, but it also includes money you earn from interest, exchange rate, sales of shares, property and equipment. It is also called the top line because it is in the top position on a company’s income statement.
On the other hand, net revenue is the earnings you made in a given period after deducting all the expenses incurred over the same period. Net revenue compares the income you earn with your expenses. In accounting, that final figure or bottom line of an income statement is called net revenue, which shows the remaining profits after accounting for business costs. Since net revenue is determined by considering COGS and allowances (like discounts), it provides a better picture of the financial health of a company.
Bear in mind that gross revenue vs net revenue are used together to find out the financial health of a company, but still they don’t fully show the financial health of a business.
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Why it is Important to Understand Gross vs Net Revenue?
Understanding the difference between both is important for both investors and business owners. Investors can better evaluate the business’ ability to generate profit and its growth potential by the gross revenue. In case, you have opened a business in a new location, the gross revenue will be an important indicator to understand the growth potential without taking into account the one-off cost invested to make the new opening.
The importance of gross revenue doesn’t surpass the worth of net revenue. Recognising the net revenue is the best way for business owners to determine the worth and cost of their products and services. Even if you are generating a lot of revenue, without working out your net revenue- by deducting all the expenses associated- you can’t judge whether the product or service is profitable for your business or not. By ascertaining it, you will be able to see where you can or can’t cut costs to make your business efficient. In addition, it lets you know the profit-generating opportunities.
Quick Sum Up
Keep in mind that calculating gross revenue vs net revenue together is not sufficient enough to understand the financial health of a business. There are a lot of other factors and financial metrics that are used to better ascertain your business profitability. Gross revenue is a good indicator for investors to gauge the growth potential and overall picture of a business, while net revenue provides a comprehensive view of the business ability to make profit.
Disclaimer: This blog contains general information about gross vs net revenue.