How To Use the Total Revenue Formula To Grow Your Business
By Indeed Editorial Team
Updated March 23, 2021 | Published January 22, 2021
Updated March 23, 2021
Published January 22, 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Ensuring that your business is profitable is about more than good client relationships or excellent branding. It's also about meticulously keeping track of all relevant data and knowing how to employ key metrics to gain essential insights into your business's financial health. One of the most important measures of income for a company is its total revenue. In this article, we discuss why total revenue is important and explain when and how you can use the total revenue formula to help you make well-informed business decisions.
When do you use the total revenue formula?
Businesses use the total revenue formula to calculate the total revenue for a specific period. Total revenue, or gross revenue, is the total income a company has received through sales of goods or services during a reporting period. All of the interests and dividends that a company has earned during that time also form part of the total revenue.
Although people sometimes use the terms "gross sales" and "total revenue" interchangeably, they are actually two distinct measures of income. Whereas gross sales include all sales of services or goods during a reporting period, total revenue equals gross sales plus interest and dividends earned.
Companies need to know the total revenue for a reporting period before they can calculate the marginal revenue. Marginal revenue shows how revenue increases per each additional sale. You'll also need to calculate the total revenue for a reporting period before you can determine a company's net income.
Net income is the profit a company has made during a reporting period, and you calculate it by subtracting all expenses from the total revenue. Total revenue is also an important metric if you want to calculate your company's gross margin or financial ratios such as gross margin percentage.
Why is total revenue important in business?
Total revenue is an important metric because it clearly shows how much a company is making from its sales or services. Decision-makers can study changes in revenue for various insights, such as whether their marketing strategies are effective or how price changes affect demand.
A company can only be profitable if its income exceeds its expenses. This means that the relationship between revenue and costs is a key consideration in all business decisions. Decision-makers use total revenue to make important decisions regarding the pricing of their goods or services. For instance, if costs exceed total revenue, a business can try to rectify the situation by either reducing costs or increasing prices.
Businesses also use total revenue to determine whether they should remain in operation or shut down. If total revenue consistently fails to exceed costs, it may not be viable for a business to remain in operation.
How to calculate total revenue
To calculate your company's total revenue, you simply multiply the number of products you sold by the average price per unit sold during a period of time. If you have a service-based company, you need to multiply the number of customers by the average price for services rendered.
Here's a step-by-step guide you can follow to figure out the total revenue for a reporting period:
1. Determine the number of units sold
The first step you should take is to determine the number of units you've sold. However, if you own a service-based company, you need to determine the number of clients you've provided a service to during a certain period. Where you'll find this information depends on how you're keeping track of your inventory, service contracts and clients—it may be through a spreadsheet, inventory or client management software or an accounting package.
2. Determine average selling prices
The next step involves determining the average price per unit sold or service rendered. To find the average price per unit sold, for instance, you simply divide the gross sales by the number of units sold.
3. Use the relevant total revenue formula
Once you've gathered all of the necessary data, you can use one of two formulas to calculate the total revenue. If your business involves the sale of products, employ the following formula:
Revenue = number of units sold x average price of units sold
If your company is service-based, you can use this formula:
Revenue = number of customers x average price of services
4. Add nonoperating income
If your company also earns nonoperating revenue, such as dividend income or interest earned on investments, you should remember to add this to the sales revenue you've calculated. This will give you the total revenue earned over a period of time.
Example using the total revenue formula
Here's an example of how you can use the total revenue formula to help your business make well-informed decisions:
The owner of Trendy Shoes is worried about dwindling sales and plans to sell all shoes at discounted prices to entice more customers to make purchases. During the last month, he sold 50 pairs of shoes at an average price of $100 per pair, which he entered into the total revenue formula:
$5,000 = 50 x $100
To attract more shoppers and increase his client base, he has decided to sell all shoes at a 20% discounted rate. This means that the average selling price of a pair of shoes will be about $80. To calculate how many pairs of shoes he must sell to maintain the revenue of the previous month, he uses the following calculation:
$5,000 = number of units x $80
To determine the number of units he needs to sell, he divides $5,000 by $80, which equals 62.5. This means that he will need to sell about 63 pairs of shoes to match the previous month's total revenue. If he does some market research and thinks that lowering the prices of his shoes will likely lead to an increase in sales, it may be a good idea to move forward with that plan.
Even if he doesn't increase his previous total revenue, he will hopefully gain new clients who he can try to retain by offering excellent service. Also, if he adds their details to his client database, he can try to build new relationships by informing them of future sales and incentives.
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