Running a successful business is more than just selling a great product or service. Even if you’re recruiting customers and exceeding their expectations, you could still fail. Business owners need to understand the inner workings of their business intimately in order to make better strategic decisions.
This process typically relies heavily on business financial metrics. Gross revenue is one of the most important variables for business owners to grasp, as it’s a number that you’ll use in many equations to determine different trends within your company.
Let’s take a deeper look at gross revenue and why it’s important for small businesses.
Gross revenue, also known as gross sales, refers to the amount of money you bring in before you deduct your expenses. This concept contrasts with net revenue, also known as net sales, which refers to the amount of money you bring in after your expenses are deducted.
In most cases, net revenue offers a clearer picture of how much money you have. For example, if you make $10,000 in sales but have $6,000 in expenses, then you would likely have $4,000 on hand. However, there are significant reasons to record your gross revenue and report these numbers.
Both your gross revenue (gross sales) and your net revenue (net sales) can be found on your income statement. They are traditionally located at the top of the statement reporting the revenue you made during that specific time period. Revenue serves as the starting point for determining your profits—after you calculate your gross and net revenue, you can subtract the cost of goods sold (COGS), operating expenses, and other costs to determine your net profit.
Most small businesses review their income statements monthly, quarterly, and annually. This allows them to view a small window of profits from the past few weeks (especially during a peak sales season) along with a big-picture view of revenue growth over time. These documents can guide organizational change to cut expenses or seek more revenue-producing opportunities.
If you work with investors or seek out a loan, you may be asked to present your current and past income statements for review. These parties also look at your balance sheets and cash flow statements to track the health of your organization.
Gross revenue highlights the potential for your business to make money, especially when it first opens. Investors look at gross revenue to understand if there’s a demand for your products or services.
When businesses first open, they often have higher expenses than those in operation for some time. You might have business loans to pay back, startup costs like equipment, and other operating expenses like increased marketing fees for your business’s debut.
All of these costs will drive down your net revenue and make it look like you aren’t making money. However, just because you aren’t making money when you first open doesn’t mean your business isn’t an immediate success. Most companies operate at a loss when they first open—this is why investors look at gross revenue.
Gross revenue can paint a picture of how customers react to your business. Your gross revenue will likely spike during a grand-opening event, for example, because you’ll bring so many people to your business. Each month, your gross revenue should increase as more people learn about your company and enjoy what you offer. Even if you aren’t making money yet, gross revenue can speak to sales and revenue growth.
Investors look at gross revenue to understand demand and potential. You can prove that you’re driving more customers to your business each month and selling more items with each new and repeat customer who walks through your doors.
Even if you aren’t planning to work with vendors to fund your business, you may need to report your gross revenue to lenders if you want to secure a small business loan. Lenders evaluate gross revenue when calculating the risk of giving money to your business.
If you can prove that your revenue continues to grow, a lender is more likely to give you a loan—this is because the odds are higher that you’ll be able to pay them back. However, if your revenue has been stagnant or declining, then the loan holds a higher level of risk. This is true even if you want to use the loan to grow your business and increase your revenue. As a result, you may get approved for a smaller loan or less favorable terms.
This doesn’t mean you need to worry if you want to secure funding for your small business: your gross revenue is just one factor that lenders look at when approving loans. There are also multiple reasons why you might have lower revenue levels in the past few months or years—like a global pandemic. You just need to find the right lender who is eager to help.
Accounting can be intimidating to business owners who don’t have strong financial backgrounds. However, you don’t have to be a numbers expert to put together clear reports and provide their context.
It’s not uncommon for income statements to come with a page of commentary: a separate sheet that provides context about the numbers to third parties. This commentary can help investors or lenders to better understand your reports. For example, you can explain why your advertising costs increased or your insurance costs went down. You can review revenue changes with investors and discuss your pandemic reopening levels.
The numbers in your reports tell a story. You have the opportunity to interpret the information and take action based on what you think.
At Lendio, we’re passionate about helping small business owners achieve financial success. To learn more about the basics of accounting and bookkeeping, check out our resource center. We can also help you learn about different funding opportunities to grow your business. From short-term loans to business credit cards, our team is here to help you.