Sales Revenue Definition Formula How To Calculate

Sales Revenue Definition

It is the very first line item available in the income statementIncome StatementThe income statement is one of the company’s financial reports that summarizes all of the company’s revenues and expenses over time in order to determine the company’s profit or loss and measure its business activity over time based on user requirements.read more. In the case of manufacturing companies, it is a calculation by multiplying the number of units sold or produced by the average sales price per unit of that item.

Sales Revenue Formula

Sales Revenue formula= Number of Units Sold * Average Sales Price per Unit

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For serviced-based companies, revenue is expressed as a product of the number of customers served an average price of service, which is represented as,

Sales Revenue formula = Number of Customers Served * Average Price of Service.

However, it is important to note that the revenue booked does not necessarily mean the entire revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more from sales has been received in cash. A certain portion of this revenue may be paid in cash, while the remaining portion may be purchased on credit through terms such as accounts receivableTerms Such As Accounts ReceivableAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. read more.

Furthermore, the revenue can be broken down into gross and net revenueNet RevenueNet revenue refers to a company’s sales realization acquired after deducting all the directly related selling expenses such as discount, return and other such costs from the gross sales revenue it generated.read more. Gross sales include all receipts and billings realized from the sale of goods or services but do not deduct any sales returns and allowances. On the other hand, net sales deduct all sales returns and allowances from gross salesGross SalesGross Sales, also called Top-Line Sales of a Company, refers to the total sales amount earned over a given period, excluding returns, allowances, rebates, & any other discount. read more.

Steps to Calculate Sales Revenue

Sales Revenue Examples

Example #1

Let us consider the example of a tire manufacturer, which produced 25 million tires across different vehicle segments in 20XX. Throughout the year, the company sold 10 million tires at an average price of $80, 10 million tires at an average price of $125, and 5 million tires at an average price of $200 across different vehicle segments. Determine the revenue for the company.

Firstly, let us determine the number of units manufactured and sold during a specific period, say annually. Now, since the number of units produced is driven by demand, which forms the basis of the function for the price, let us assess the average sales price per unit. Finally, the revenue is calculated by multiplying the number of units sold (step 1) and the average sales price per unit (step 2).

Sales = number of units sold * Average sales price per unit

Total Revenue = $3,050,000,000 or $3.05 billion

Example #2

Let us assume that there is a mobile manufacturing company in which the monthly sales volume has increased from 1,500 to 6,500 during the 12 months ending in November 2018. Then, the price function during each month is governed by the function (7000 – x), where ‘x’ is the number of mobiles sold during the month.

Please note that during March 2018, the mobile sales volume stood at 2,900. Therefore, calculate sales in March 2018 and November 2018.

Based on the available information, the monthly revenue from sales can be calculated as below.

Monthly sales = x * (7000 – x)Monthly sales = 7000x – x2

The mobile sales stood at 2,900 units during March 2018, then the total monthly sales in March 2018 can be calculated as,

Monthly revenue March 2018 = 7,000 * 2,900 – (2,900)2Monthly revenue March 2018 = $11,890,000 or $11.89 million

Again the mobile sales went up to 6,500 units during November 2018, then the monthly sales in November 2018 can be calculated as,

Monthly revenue November 2018 = 7,000 * 6,500 – (6,500)2Monthly revenue November 2018 = $3,250,000 or $3.25 million

Relevance and Uses

Although profit might be the major focus of the smaller business entities, another financial term is just as important. The measurement of sales can provide actionable information about the business, which is not captured by profitability alone. One can extract the maximum benefits from the business information by recognizing the importance of revenue measurement.

It helps in examining trends in sales over some time, which enables the business owners to understand their business much better. Some of the benefits of tracking the revenue are like analysis of daily sales trends to understand if there is any particular pattern in customer behavior. Further, a business owner can observe the monthly revenue from sales trends to establish a relationship between sales volume and seasonality. Finally, based on this revenue trend, the management can make certain decisions to boost production or support the sales price per unit by managing the sales volume according to the customer profile, seasonality, etc.