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Accounting is widely regarded as one of the most stressful parts of running a business. In addition to having to manage your money, the confusing terms and complex calculations can make this aspect of business intimidating.
In this blog post, we’re breaking down one of the accounting terms every merchant needs to understand: annual business revenue. Understanding this concept and being able to calculate your annual revenue are essential skills for every merchant.
Using this guide to annual business revenue will ensure that you have all the information you need to measure your business’s success and help it grow consistently.
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What Is Annual Revenue?
Annual revenue is all of your business’s income from the sale of products or services, assets, and capital over a 12-month period.
It’s common for business owners to confuse annual business revenue with profits, but they aren’t the same. Annual revenue refers to gross revenue, or all of the income you generate, in 12 months. Profit, on the other hand, is the money left over after deducting the cost of inputs, expenses, and taxes from your income over a given period.
Let’s take a look at a practical example. An ecommerce business called FashionShop sells t-shirts. Last year, the business sold $100,000 worth of t-shirts, which cost $40,000 to make.
In this case, FashionShop’s annual business revenue is $100,000. Factoring in the expenses that are incurred to produce and sell the t-shirts, like fabric, labor, and marketing, we see that the retailer makes a profit of $60,000.
Why Is Annual Revenue Important?
Annual revenue is a crucial metric for every business. It’s essentially a performance barometer. This is why most merchants spend a lot of time analyzing their business’s performance each year in this area.
Ultimately, annual revenue is important because it is an excellent marker to track your business’s growth and health. It’s also used to calculate how much tax your business will pay. Plus, it’s one of the key metrics banks look at during the loan application process.
What Are the Different Types of Revenue?
There are many ways that a business can bring in revenue. The methods used to generate income determine whether it’s considered to be operating or non-operating revenue.
Operating Revenue
Operating revenue is the total amount of money that a business brings in from its primary business operations (i.e. sales of products or services). For retail stores, operating revenue comes from the sale of goods.
For example, Entertainment Land is a store that sells audiovisual equipment. It makes $1 million from selling TVs in one year. This $1 million is operating revenue because the store earned this income from its primary business.
You can easily work out your operating revenue when you use Pay.com. Our Pay Dashboard comes with analytics and reporting tools that enable you to see the revenue the sale of your products has generated via a variety of payment methods.
Non-Operating Revenue
Non operating revenue is any business revenue earned from non-primary business operations.
Continuing with the example of Entertainment Land, non-operating revenue would come from any activities that aren’t related to selling audiovisual equipment. Like renting part of its store to a business that installs sound systems in customers’ houses. There are a few types of non-operating revenue, including:
- Asset and capital sales: Revenue from the sale of any equipment, property, or other asset.
- Dividends: Money paid out to your business as a result of its shareholding.
- Interest: Income received as a result of interest on a loan provided by your business.
- Rent: Any business revenues gained from leasing a property or equipment to another entity.
- Contra: Revenue deductions due to returned goods, sales discounts, sales allowances, and other negative-value activities.
Is Annual Revenue the Same as Annual Sales?
Although these terms are often used interchangeably, there are critical differences between annual revenue and annual sales.
Annual revenue is all of a business’s income generated over 12 months, including operating revenue (income from selling goods or services) and non operating revenue (e.g. the sale of equipment or renting out a property). On the other hand, annual sales refers to a company’s income from selling goods or services.
If annual revenue includes all your business’s income over 12 months, then that figure will include your sales numbers. Fortunately, working out our annual sales is made easy with Pay.com. You can see the income you’ve generated via various payment methods at a glance using our Pay Dashboard and reports.
How to Find the Annual Revenue for a Company
If you’re wondering where to find your annual sales revenue and annual revenue, you’re in luck. They’re both super easy to locate. Collect your annual financial statements and head to the income statement. There, you’ll find the most recent annual sales figure as well as your business’s total income for the year.
Typically, you’ll also often be able to view annual sales from the previous year, enabling you to compare your business’s year-on-year performance and see if your sales are increasing or decreasing.
The income statement is one of the three key financial statements (along with the balance sheet and cash flow statement) that provide a snapshot of a business' health. An income statement includes the following information:
- Annual revenue or income: Income from the sale of products, services, assets, and capital over a 12-month period.
- Annual sales revenue: Income from sales of goods or services to customers over a 12-month period. This will be broken down into gross sales (sales without any deductions) and net sales (gross sales minus sales allowances, discounts, and returns).
- Gross profit: Gross profit is the difference between a company’s sales and its cost of goods sold (COGS).
- Expenses: Expenses are costs sustained while operating your business. These costs can either be fixed or variable.
- Taxes and obligations: The amount of money you are required to pay to the government based on your net sales revenue.
- Net business income/loss: Also known as profit, this is the amount of money your business has left after all expenses have been paid.
Besides annual revenue, the income statement is also useful for calculating return on investment or ROI. Finding this figure will help you to determine whether you’re investing your profits for optimal business growth.
Formula for Calculating Annual Revenue
Calculating your annual business revenue may seem daunting, but it’s actually quite simple. You only need two figures to calculate your annual revenue: the quantity of goods or services you sold during the year, plus the sales price of those products.
However, before we jump into the formula, it’s important to note that the accounting method you use will impact the amount you’ll see on your income statement.
If you work with the accrual accounting method, your annual business revenue will include sales of goods or services you’ve already delivered to your customer but haven’t received payment for. In contrast, if you use the cash basis accounting method, your annual revenues only include sales for which you have been paid.
Once you have the amounts that are relevant to your accounting method, all you need to do is plug them into the following formula:
Annual revenue = Quantity of products sold × Sales price
Let’s continue with the example of Entertainment Land. During its last financial year, the business sold 250 super high-definition TVs priced at $4,000 each. Using the formula above, you can see that Entertainment Land’s annual revenue is $1 million.
Annual revenue = 250 × $4,000
Annual revenue = $1,000,000
Examples of Annual Revenue Calculations
Let’s take a look at a few examples so you can get a better idea of what’s involved when calculating your annual revenue.
Example 1: Calculating Annual Revenue from Multiple Products
Suppose there’s a pie shop called Yummy Pies that sells three types of pies. Steak pies cost $5, chicken pies cost $4, and vegetarian pies cost $3.50. The business sold 5,000 steak pies, 6,000 chicken pies, and 4,000 vegetarian pies in the previous year and didn’t make any non-operating revenue.
To calculate the annual revenue of this business, we must first calculate the revenue brought in by each product:
Steak pies: $5 × 5,000 = $25,000
Chicken pies: $4 × 6,000 = $24,000
Vegetarian pies: $3.50 × 4,000 = $14,000
Yummy Pies’ total annual revenue is equal to the sum of the revenue from the sale of its steak, chicken, and vegetable pies:
$25,000 + $24,000 + 14,000 = $63,000
Calculating annual revenue can be made much easier when you sign up for an account with Pay.com. You can track your sales from multiple payment streams and reduce the time and effort needed to work out your annual revenue.
Example 2: Calculating Annual Revenue with Operating and Non-Operating Revenue
CoffeeBean is a coffee shop that’s located in a bustling business district. It serves 4,000 cups of coffee to customers each month, at a price of $2.75 per cup.
The owners of CoffeeBean also own the building they operate from. There’s an upstairs office that they don’t need for the coffee shop, so they rent out to another business for $2,000 per month.
In this case, to find out the total annual revenue, we’ll need to calculate both the operating and non operating revenue.
Operating revenue per month: $2.75 × 4,000 = $11,000
Annual operating revenue: $11,000 × 12 = $132,000
Next, we need to figure out the non-operating revenue. This can be done by multiplying the monthly rent payments by 12 months:
Non-operating revenue: $2,000 × 12 = $24,000
Based on this, we can work out the total annual revenue of CoffeeBean. All we need to do is find the sum of the non operating revenue and operating revenue from the sale of coffee:
$132,000 + $24,000 = $156,000
Total annual revenue = $156,000
How to Use Annual Revenue Results
Annual business revenue is an important figure to know and is useful for a variety of purposes.
It can be used as a marker to track the progress and health of your business. Comparing your revenue year on year to see will help you to see if it is increasing, staying the same, or declining. Additionally, if your business is seeking financing, annual revenue is often one of the key deciding factors for loan approval. This is especially true if your business’s credit is weak.
How Is Annual Revenue Different from Net (Business) Income?
Annual revenue and net business income are different but they can both be found on the income statement.
At the top of an income statement, you’ll find annual revenue, which includes all of a business’s income from the sale of products or services and any assets or capital over a 12-month period.
Net business income refers to a business’s profit and appears near the bottom of the income statement. It represents how much money is left over after all expenses such as payroll, raw materials, and taxes have been subtracted from revenue.
Should You Consider Annual Recurring Revenue?
Annual recurring revenue (ARR) is a crucial business metric for software, SaaS, and other types of subscription businesses and should definitely be included in calculations.
It indicates the amount of revenue a business can expect to earn over a year. It is calculated by multiplying monthly recurring revenue (MRR) by 12.
To calculate MRR, you need to know how many active subscriptions – or accounts – your business provides to customers. This number is then multiplied by the average revenue per account.
MRR = Number of active subscriptions × Average revenue per subscription
To better understand MRR and ARR, let’s consider a practical example. Swift Software provides its clients with various packages of inventory software using a subscription model. It has 250 monthly subscribers and the average value of these subscriptions is $15.
Using these numbers, we can work out Swift Software’s MRR:
MRR = 250 × $15
MRR = $3,750
Following from this, we can calculate the business’s ARR:
ARR = MRR × 12
ARR = $3,750 × 12
ARR = $450,000
As you can see from this example, recurring revenue can make a significant difference to your business’s bottom line and should definitely be included in your financial calculations.
What Is a Good Annual Revenue for a Small Business?
There isn’t a specific number that is considered to be ‘good’ when it comes to small business revenues. This is because revenue varies considerably depending on business type, number of employees, industry, and location.
For example, according to the US Small Business Administration (SBA), businesses with no employees make on average around $46,000 in annual revenue. Companies with one to four employees make much more, with $387,000 in yearly revenue, while those with five to nine employees average $1,080,000.
At the end of the day, what’s most important is that your business revenues are continually growing, along with your profits. If they aren’t, you’ll want to reassess your business plan and look at some money management tips for your small business.
How to Report Revenue on Applications for Financing
When applying for financing, you should always follow the directions of the particular financial institution you're applying to. However, in general terms, banks require you to include your gross annual revenue from the previous year.
You should leave out any business revenue you can't verify or that's not directly related to your operations. It's also important to understand that most banks are not interested in sales or business revenue projections because they are unreliable and tend to be inflated by business owners.
How Pay.com Can Help You Grow Your Revenue
You already know that the Pay Dashboard is a great tool for tracking sales and working out your business’s annual revenue. In addition to saving you loads of time and effort when it comes to assessing performance, Pay.com’s features can also help you to grow and optimize your revenue.
You can create a customized checkout page for your website with our Pay Dashboard – no coding experience necessary. You can also display the PCI DSS logo on your checkout page to show customers that their transactions are completely secure. Both of which help to build trust with your customers and could lead to repeat business.
Then there are the myriad ways that you can accept payments with Pay.com. In just a few clicks, you can select the payment methods that your customers like best. These include credit and debit cards, digital wallets, bank transfers, and other alternative payment methods.
The Bottom Line: Understanding Annual Revenue Is Important for Business Owners
Annual revenue is an important tool for understanding how your business is performing. It represents the total amount of money your business makes in a year from selling products (operating revenue) and via other income streams (non operating revenue).
Working this amount out each year and identifying whether your revenue is increasing, decreasing, or staying the same will give you information about the health of your company.
Although it might seem complicated, it’s relatively easy to understand, calculate and interpret annual revenue when you know what to look for. Having a good grasp on where your revenue is coming from can help you to make better decisions as your business grows. It’s also essential for working out your tax liability and applying for financing from banks or other financial institutions.
Working out your annual revenue becomes much easier with Pay.com. Our Pay Dashboard has powerful reporting and analytics that enable you to view all of your sales, making managing your business finances simpler and faster. Click here to get started now!
