Gross revenue is the total revenue that a company earns during a specific timeframe. All the income that a company generates from the sale of goods and services comes under the gross revenue. On the other hand, net revenue is gross sales less allowances and returns. Let’s understand gross vs net revenue with the help of a simple example.
Company A sells 10 phones for $1000. Here the gross revenue is $10,000 (10*1000). If two customers gave the phone back and got a full refund, then the net revenue will be $8,000 ($10,000 – 2*10000).
Gross vs Net Revenue – Difference
Net revenue or net sales is gross revenue minus discounts and returns. It does not include the expenses related to closing the sale.
While preparing financial statements, it is important for a company to consider the possibility of a return. For instance, a company selling some electronic device or appliance would expect some customers to return the products due to various reasons, such as a defective product.
A certain amount is kept as a provision to take care of the return. Later, the provision amount is adjusted depending on the actual return.
Since net revenue is after considering certain discounts and allowances, it gives a better picture of the company. However, it is not enough to understand the whole profitability picture of the company.
Gross vs Net Revenue – Why it’s Important to Know the Difference?
Investors want to know the gross revenue because it explains the business’ ability to increase sales and the possibility of growth. The gross revenue figure gets more important if a business opens a store in a new location. The stakeholders would always want to know the revenue that the new store is generating.
On the other hand, net revenue in such a case would help get a clearer picture. It would help the owners decide their next course of action regarding cost and worth. Even if a product generates good sales and brings in a lot of revenue, it still needs to be in line with the expenses.
Thus, net revenue helps a business understand points where it can minimize expenses. Further, if there is more than one product, then net revenue would help identify the product that generates more profit and the products that are generating higher revenue and adding more expense.
Gross vs Net Revenue – Relevance to Business Financing
While forwarding a loan, a bank looks at the borrower’s debt service coverage ratio and wants to know how the company’s core product and services are working. A company with increasing gross revenue may mean a strong product line and fair demand in the market. No bank would want to extend a loan to a company that does not show the potential for higher gross revenue.
Other income is not of much relevance when looking for business finance. It is because these incomes are not recurring and core to the business operations. Banks always look for companies who have the capacity to pay their interest on a regular basis. Therefore, extend the loan to the business with a consistent revenue stream from the core business.
Both Gross and net revenue separately are not sufficient to understand the company’s profitability. Profit for a company is the amount that can be re-invested or given to the shareholders in the form of dividends.
Gross revenue does not reveal the different income streams of a company. A company may have one more income source in addition to the sale of goods and services. For instance, if a business invests in an interest-bearing account, bonds, or stocks of the other companies, they would earn some income from those investments.
Gross revenue, however, helps investors and stakeholders understand how much revenue the company is earning from its core operations.
Net Revenue vs. Operating Income
It is important to understand the difference between net revenue and operating income. As in normal conversation, the two concepts may be used interchangeably. Net revenue and operating income both come in the income statement. Net revenue is the sum of all the sales, including credit sales, allowances, returns, and discounts.
Operating income, on the other hand, comes below the Net income. One calculates operating income by deducting business expenses from net revenue. Operating expenses include marketing expenses, salaries, advertising, insurance, rent, and the cost of doing business.