Revenue is the most common word used to measure the success or progress of any kind of business or economic firms. It is very important for all of us to understand the concept of revenue and its calculation so that we can analyse the growth of our business. For any company, it is good to keep track of their revenue in order to evaluate their total profit. In the forthcoming subheadings, various concepts of revenue formula and their applications are explained in detail.
The total number of receipts from the sales of any goods or services at any quantity is referred to as revenue. Revenue is the total income obtained through a business. In general, revenue can be calculated as the product of the number of goods sold and the price of the goods. The term revenue in economics is closely associated with two important terms namely:
Average revenue formula
Marginal revenue formula
The revenue earned per unit product sold is generally calculated using the average revenue formula. The average revenue formula is given as the ratio of total revenue to the number of units sold.
Average revenue formula = (Total revenue) / (No. of units sold)
Marginal revenue formula gives the additional revenue earned by selling an additional unit of the output product. So, in other words, marginal revenue can be regarded as the change in total revenue due to the sale of one more unit of the product.
Therefore the sale of goods or services by any company earns cash to them. This total amount of cash obtained by selling the goods or services is called the revenue of the company. Let us take a real life example of a shopkeeper for the better understanding of revenue concept. In any shop, the shopkeeper sells several items at different prices. He may also offer discounts on a few items in his shop. Revenue should not be confused with the total amount he may earn by selling all the products in his shop. It is very important for the shopkeeper to consider the discounts he has offered on his items. This is when the net revenue formula comes into picture. The net revenue formula computes the revenue of a person which is earned after deducting the discounts offered on the commodities that he had sold. The net revenue formula does not consider the other forms of cash income of the company such as investments etc.
The most important fact to be considered while formulating an income statement or the profit / loss statement of a company is its Revenue. Revenue is the numerical figure obtained after deducting all kinds of expenses. In economics, the revenue is used as a factor of determining the quality and progress of sales of any goods or services. Mathematically, revenue is calculated as a product of price and quantity of the items sold.
It is very easy to calculate revenue and to remember the total revenue formula. The only thing is that we will have to know the price of each unit good or service and the total number of goods sold. It is very important for any company to keep a record of its revenue. This will help the company in effective financial management. The most basic representation of total revenue formula is:
Revenue = Quantity x Price
A newspaper selling shop sells 600 copies of newspaper per day. The shop charges Rs. 4 per copy of the newspaper. What will be the total revenue of the shop per day?
Quantity of Newspapers sold = 600
Price per newspaper = Rs. 4
Revenue = ?
Total revenue formula is given as:
Revenue = Price x Quantity
Revenue = 4 x 600
Revenue = Rs. 2400
Therefore, the revenue earned by the newspaper shop per day is Rs. 2400/-
If 25 items are sold in a shop to earn a total revenue of Rs. 1000, what would be the price of each item sold?
Quantity of items sold = 25
Total revenue = Rs. 1000
Price per item = ?
The total revenue formula is given as:
Revenue = Price x Quantity
This formula can be rewritten as:
Price = Revenue / Quantity
Price = 1000 / 25
Price = 40
So, the price of each item is Rs. 20
Revenue and profit are two different words in economics. They should not be misused one in place of the other.
Profit is arrived at by deducting all forms of expenses from the total revenue. Profit is sometimes regarded as net revenue.
1. How Do You Calculate Revenue?
Revenue is sometimes referred to as sales revenue. Revenue is the total amount of gross income earned by selling the products or services. The simplest way of calculating revenue of a company is multiplying the price of a unit item with the total number of items sold. Mathematically revenue is given as the product of total number of sales and the average price per sale of goods or services.
2. Are Revenue and Net Revenue Different from Each Other?
Yes, there is a difference between revenue and net revenue. Revenue or total revenue is the total income obtained by selling the products and is calculated as the product of price per item and the number of items sold. Net revenue is the revenue earned after the deduction of all the expenses of the company incurred during the sales of the goods or services. Net revenue is usually lesser than the total revenue in numbers.