To stay in business, businesses have to generate revenue — that is, they have to sell enough products or services to cover their costs of operation and turn a profit.
What is annual revenue, then, and why is it important? Here’s what it is and how you can use it to manage your business better.
What Is Annual Revenue?
Your annual revenue is the amount of money your business takes in from sales and services every year before you subtract operating costs and expenses.
How Do You Calculate Annual Business Revenue?
You can estimate your annual revenue by multiplying the number of sales by your average sale price.
Let’s say that you own a casual restaurant where the average check price is $20 per person. If your restaurant served 18,000 diners last year, your annual revenues would be $360,000.
$20 per person × 18,000 people = $360,000
How Do You Use Revenue?
You can use revenue as a benchmark to gauge how your business is performing.
Let’s say you wanted to increase your restaurant sales by 15% over the past year. You could track your revenues each month to make sure they’re rising fast enough to reach your goal.
Another way to use revenues is to express expenses as a percentage of revenue and use this metric to control your budget. At your hypothetical restaurant, for instance, you might want to make sure that your food costs didn’t exceed 30% of your revenues.
How Is Revenue Different From Net Income?
Your revenue is the top line on your income statement. Your income is what’s left of your revenue after you subtract your operating expenses.
Net Income = Total Revenue − Total Expenses
If your hypothetical restaurant had an annual revenue of $360,000 and $80,000 in overhead expenses and its cost of goods sold was $216,000, your net income would be $64,000.
Net Income = $360,000 − ($216,600 + $64,000) = $64,000
Why Do Small Business Owners Need to Know Their Revenue?
Owners need to know their revenues to track the effects of changes in their product mixes, operating costs and marketing strategies. For example, a restaurant owner would like to know how much revenue increased with the introduction of a new menu item or a reduction in prices.