As a business owner, you measure your incoming profits and revenue with several metrics. Some of the common metrics for this include net income, gross revenue, and net revenue.
But what are the differences among these measurements, and which is the best measurement to tell you the financial health of your business?
All these measurements are very important, so you need to understand what they mean and what they are telling you about your business.
In this article, we discuss these three terms and what they mean for your business.
Gross vs. net
Gross is the whole or total amount of something, while net is what remains from the whole once some deductions have been made. For example, a business with a revenue of $5 million and expenses of $1 million has a gross revenue of $5 million (the whole amount) and a net income of $4 million (what remains after deductions).
In accounting and finance, several items are referred to as gross on the financial statements:
- Gross Revenue: It is all revenue before netting out any items such as returns and refunds.
- Gross Assets: It is the value of all assets before making any deductions.
- Gross Margin: This is the gross profit divided by the revenue to show gross profit as a percentage.
Examples of net items shown on financial statements include:
- Net Assets: This is the value of assets after deducting certain liabilities.
- Net Earnings: This is what remains after deducting all expenses from revenues.
- Net Margin: This is net income divided by revenue to show net income as a percentage of revenue.
Revenue vs. income
Revenue refers to the total amount of money that a business generates from the sale of goods and services. It is also referred to as the top line since it is added to the top of the income statement.
So, revenue is the cash generated by a business before taking out the expenses. It shows how effective a business is at generating sales, but it doesn’t consider the operating efficiencies, which can have a great impact on the bottom line.
When you hear that a company has “top-line growth”, it means that the company has recorded an increase in revenue or gross sales.
Conversely, income, whether gross or net, refers to the total profit or earnings of a company. When analysts and investors discuss a company’s income, they are referring to the net income or the profit of the company.
The terms income and revenue are sometimes used synonymously; however, net income, or the bottom line, represents the total earnings after accounting for any additional income and any expenses.
Let’s consider the following revenue vs. income example:
In 2019, Apple posted a top-line revenue of $260 billion. This represented a 2% year-over-year decrease. Apple also posted a net income of $55.3 billion for the same period, which was a 7% year-over-year decrease.
From the above, you can see that Apple’s net income is smaller than its total revenue. The reason is that the net income considers Apple’s expenses over that period. This example clearly shows the difference between revenue and income when referring to the financials of a business.
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Net income vs. gross revenue vs. net revenue
Every business should know how successful it is at any given time. This calls for businesses to evaluate their profitability, including their ability to control expenses.
It’s also important to know the costs associated with doing business, such as the cost of goods sold, employee payroll, rent, utility bills, and office supplies.
In most cases, investors are more interested in a business’s gross revenue as it shows the ability of the business to generate sales and its potential for growth. If you’ve just released a new SaaS offering, your gross revenue will be extremely important to track to see the viability of your new subscription service.
However, this does not mean that you should forget about net revenue or income, as they give you the best information for making decisions related to cost and worth.
For example, a service may be generating a lot of revenue, but you will only know its true profitability after deducting the expenses associated with the product. For a SaaS business, you can project this by subtracting your Customer Acquisition Cost (CAC) from your Customer Lifetime Value (LTV). This way, you can know whether the service is profitable for your business or not. You can also know the costs that you can cut to make your business more profitable.
Lenders will also consider these metrics before giving credit to your business. Their goal is to know your potential to bring capital to your business. Understanding these metrics will also help you determine your ability to service the debt.
1. What is gross revenue?
Gross revenue is the total amount that you make before expenses. It is the sum of all your client billings before taxes, expenses, or withholding.
Gross revenue is the amount of money you’ve generated from selling goods and services without considering the expenses.
For example, if your company has 1000 subscriptions at $50/month each, then your gross revenue for that month will be $50,000 ($50 × 1000).
2. What is net revenue?
Net revenue, which is sometimes called net sales, refers to the total amount that a business makes from its operations minus any adjustments such as refunds, returns, and discounts.
Let’s use our previous example to explain how net revenue is calculated. Suppose 20 of your subscriptions were canceled mid-month with a full refund.
This means that you’ll subtract $1,000 (20 × $50) from the gross revenue for a net revenue of $49,000.
Next, you decide to offer a price-matching deal vs. your main competitor to reduce churn and 10 customers come with your competitor’s ad with a price of $40, so you refund each of them $10.
Net revenue is revenue minus any adjustments, so you should also subtract $100 to get a net revenue of $48,900. Thus, net revenue will give you a more complete picture of your revenue.
3. What is net income?
Net income is the profit that a business earns after deducting expenses and other allowances. It is the total amount of profit or loss after expenses.
Net income is calculated by taking the gross income and subtracting all the business expenses such as marketing and advertising costs, legal and professional fees, tax payments, office and travel expenses, and more.
Net income is also referred to as the “bottom line” since it is the last item on an income statement. The value of net income tells whether your business is profitable or not.
To calculate net income, you start with net revenue, amd then you subtract the cost of doing business, which includes rent or mortgage payment, cost of materials, utility bills, employees’ salaries, and more. That gives you your taxable income.
After determining the amount you owe in taxes and subtracting it from your income, you are left with your net income.
For example, if you generate an annual net revenue of $150,000 and your cost of doing business is $60,000, your net income is $90,000 ($150,000 − $60,000).
Net income is a very important metric for any business. For example, after finding out that your gross revenue is significantly higher than your net income, you can evaluate your expenses to find efficiencies.
Net income, gross revenue, and net revenue are financial metrics with great significance to any business. You need to track all of these numbers for strategic and operational decision making.
A proper understanding of these three metrics can help a business to know where most of its money goes. The business can then eliminate unnecessary expenses to improve its profitability.
Gross revenue is the total amount that a business makes before expenses. It is the sum of all the business’s client billings before taxes, expenses, or withholding.
Net revenue is the total amount that a business makes from its operations minus any adjustments like refunds, returns, and discounts.
Net income is the profit that a business makes after deducting expenses and other allowances. It is the total amount of profit or loss after including expenses.
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