What Is Gross Revenue vs. Net Revenue?

It's easy to confuse gross and net revenue when determining the financial health of your company. However, if you don't account for expenses (and the difference between the types of revenue), you can set yourself up for disappointment. By understanding gross revenue vs. net revenue and proactively using these to your advantage, you can gain insights to make the best decisions for your company's future success.

What you will learn:

• What is gross revenue?
• What is net revenue?
• Comparing gross revenue vs. net revenue
• Why is understanding both crucial to business?
• How can you use gross and net revenue for financial planning?

Gross revenue is the total amount of money a business makes from selling its products or services before subtracting any costs, taxes, or other expenses. This calculation does not include any costs related to production, operation, or other expenses. It's money that comes from sales alone. Understanding gross revenue allows you to see the overall income that your organization generates from basic operations.

To calculate gross revenue, you typically use the following formula: Gross Revenue = Total Units Sold × Price per Unit.

• Total units sold: The number of goods or services the business has sold over a specific period
• Price per unit: The selling price of each unit

For example, an auto parts store sells 1,000 products at $70 each. To calculate the gross revenue, the company does this calculation: 1,000 × 70 = $70,000. The $70,000 is their gross revenue, representing the total income from sales before any costs or expenses are deducted.

Of course, this might get more complex if you sell multiple products or services at varying prices. This is where a powerful Customer Relationship management (CRM) tool comes in handy. We'll talk more about using a CRM later.

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Net revenue (sometimes called net sales or net income) is the amount of money a company brings in after subtracting returns, discounts, price reductions, and other allowances and costs. This amount reflects the income you can expect to keep from your sales, so you have a more accurate view of how much the business is really earning and how much you have available to spend.

When looking at an income statement, you can usually find net revenue listed below gross revenue. Calculating and tracking your net revenue gives you a better understanding of your company's profitability .

The formula for calculating net revenue is Net Revenue = Gross Revenue − Returns, Allowances (other charges), and Discounts.

• Returns: The value of items that customers send back to the business
• Allowances: Price reductions given to customers, often due to issues like damaged goods
• Discounts: Price reductions offered to encourage sales or reward early payments

For example, let's say a clothing retail store reports the following in a month:

• Gross revenue: $100,000
• Returns (number of items returned): $4,000
• Allowances (a batch of shirts was damaged, so the store reduced prices to sell items with slight defects): $2,000
• Discounts (the store held a Labor Day sale on new fall clothing items and discounted sweaters): $2,000

The net revenue would be calculated as: 100,000 − (4,000 + 2,000 + 2,000) = $92,000. This reflects the amount the company expects to retain after accounting for returns, allowances, and discounts.

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Each number represents a key part of a company's financial health and its progress toward current goals. However, in addition to calculating them differently, gross and net revenue provide different types of information to the company.

Here are the biggest differences:

• Position on the income statement: You can find the gross revenue amount at the top of the income statement, which is why it's often called the top-line revenue. Net revenue is typically right under gross revenue.
• Purpose: While the two numbers are related, they each serve a different purpose for monitoring financial health. The gross revenue number shows the company's total sales, but it does not give the same level of insight into the profitability that net revenue provides.
• Deductions: The gross revenue number does not include any deductions for expenses. Instead, this number simply shows the total income from sales. On the other hand, net revenue includes all the different deductions, such as returns, allowances, and discounts. Because the deductions are included in the number, net revenue offers a more accurate picture of the company's financial position.

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Many companies mistakenly focus on one number over the other. However, both values are crucial to understanding what your company actively uses when making business decisions. Gross revenue shows sales ability, while net revenue reflects actual income after deductions. Together, they provide a complete picture for making smart decisions, managing costs, and ensuring long-term profitability. Using one without the other can lead to misinformed decisions when working to meet financial goals and grow the company.

For example, a retailer sells a large volume of t-shirts, creating a high gross revenue. However, they produced a number of holiday specific t-shirts and ended up heavily discounting these items by mid-December to make sure they sold their inventory. As a result, the net revenue was lower than expected.

Gross and net revenue can also help inform smarter strategic decisions. Because gross revenue shows potential market size, organizations can use this value to guide decisions about expanding operations, entering new markets and investing in new products. For example, a high gross revenue indicates that there is a high demand for your product or service. If you have the ability to compare your gross revenue to competitors, you might be able to determine whether there's a larger market size than the one you are serving. You can also use net revenue to guide decisions on pricing, customer management, and cost control, directly affecting the bottom line.

Keep in mind that investors look at both numbers when deciding whether to invest in a company. Gross revenue is used to assess the company's overall sales strength and growth potential. But net revenue is also critical, as it reflects the company's ability to turn sales into actual earnings, indicating operational efficiency and profitability.

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You can use gross and net revenue during financial planning to make smart decisions, set achievable goals, and ensure long-term business success. By using a CRM, you can streamline financial planning and quickly get a clear picture of your current and predicted financial situation. For example, a CRM can use your gross and net revenue to predict forecasted sales for the next quarter based on past results. Additionally, your CRM can help you manage your cash flow, especially in terms of the impact that expenses have on your revenue.

Here's how to use both calculations to grow your business:

Often the best predictor of future revenue is what happened in the past. By analyzing historical gross revenue, you can spot patterns that can help predict future sales, such as which quarters typically have higher sales. You can then use this information to set more accurate targets, which makes it easier to plan for growth and more effectively allocate resources.

The same is true of net revenue. You can look at past expenses, deductions, and discounts to help avoid financial shortfalls in the future. Once you spot an issue, such as decreasing net revenue, you can dive deeper into the deductions to figure out which can be reduced.

Your company can't function without the right amount of cash at the right time. While gross revenue shows the potential cash inflow from sales, this data point doesn't account for how much the company will actually keep.

Net revenue, on the other hand, gives a realistic view of cash flow because you can see the amount of money that comes in after deductions. Since net revenue represents the amount of cash on hand, you can avoid liquidity issues by planning based on expected income.

Your gross revenue amount gives an overview of income, which helps to plan for large-scale cost management. You can then use net revenue to guide cost-reduction strategies. This value shows you the costs related to returns, discounts, and allowances — further pinpointing the issues. For example, a company may learn that reducing the number of discounts given throughout the year will not hurt sales, but instead actually improve profitability significantly.

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By using both gross and net revenue, your business can approach financial planning from a balanced perspective. Gross revenue helps you understand the organization's scale and potential, while net revenue ensures plans are realistic, reflecting actual income for growth, cost management, and profitability.

Together, they enable better forecasting, budgeting, and decision-making, leading to stronger financial outcomes.

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