Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Annual business revenue refers to the income generated by a business in a year before any expenses are deducted. This is a key number for business owners to know because it helps you determine if your company is profitable. Knowing your annual revenue also allows you to track your company’s performance against itself in previous years, as well as against competitors. Read on to learn how to quickly calculate your business’s annual revenue, plus how you can use this metric to monitor and grow your small business.
What Is Annual Business Revenue?
Annual revenue for a business refers to the amount a business made in sales over 12 months, whether that’s for products, services, or both. This number is also often referred to as the “top line,” since it’s added to the top of a business’s income statement. Annual revenue does not account for any of your expenses, such as payroll, operating costs, and rent.How does annual business revenue differ from profits? Profit is the amount you have after you subtract annual expenses from annual revenue.
How Does Annual Business Revenue Work?
When calculating business revenue, you’ll include money you earn from your main business activities, such as sales of your products or services, as well as revenue you earn from activities not directly related to your business, such as renting a floor of your building to another company. There are also two different ways to calculate annual revenue: It can be over a fiscal year, which is from whatever point in the year you start calculating, like July 1, to the same date the following year. Or, it can be a calendar year, which would start on January 1. Some businesses prefer to use one method over the other.
Calculating Annual Business Revenue
Calculating annual business revenue is relatively simple. To do it, you just need to know the prices at which you've sold products or services and the quantity of each product/service you've sold. You can calculate your annual revenue with this formula:Annual Revenue = Quantity of Each Product or Service X Sales PriceIf you sell different products and services at different prices, you would use the above formula to calculate the revenue for each product or service, and then add each total together to get your total revenue from your business’s operations.Next, you’ll want to add any other income (including investment income or sales of any assets) your business earned over the year to get your total annual business revenue.
Annual Business Revenue Example
For this example, let’s say you sell jewelry. For simplicity’s sake, let’s say you only have three products:
Necklaces: $200
Rings: $100
Bracelets: $75
Last year, you sold 500 necklaces, 750 rings, and 1,000 bracelets. We start our calculations by figuring out your revenue for each.
Necklaces: $200 x 500 = $100,000
Rings: $100 x 750 = $75,000
Bracelets: $75 x 1,000 = $75,000
Now we add each of these together to calculate total revenue.100,000 + 75,000 = 75,000 = $250,000Assuming you didn’t have any other sources of income, your annual business revenue would be $250,000. Remember, this is before taking any expenses into account. Your profits will be what you calculate after subtracting the expenses involved in making the jewelry, as well as operating expenses, from your total revenue.Recommended: How to Calculate Cash Flow (Formula & Examples)
What Is Annual Business Revenue Used For?
Calculating annual revenue is a must in order to determine your business’s annual profit. But knowing the annual revenue of your small business also comes in handy in a number of other ways. For example, you will need to know your annual revenue when you file taxes for your business. This, along with your business’s expenses, will determine how much you pay in taxes.You can also use annual business revenue to track how well your business is doing. When you look at your annual revenues, you can compare one year to another to see if your revenues are increasing, staying the same, or declining. This can have an impact on decisions you make for your business.And, if you plan on applying for a small business loan, you’ll likely have to report your annual revenue to the lender. This number, along with your credit score, can have a big impact on whether or not you get approved for a loan. Indeed, if your company’s credit profile is weak, you may need to rely on your annual business revenue to help you get financing.Recommended: Understanding Different Types of Small Business Loans
Distinguishing Net Business Income from Gross Annual Revenue
While looking at your annual business revenue is helpful for understanding how your business is doing at generating sales, it’s not the full picture. If you’re spending more than you’re making, your business will struggle to stay afloat. That’s why it’s important to determine both your annual business revenue (also known as gross revenue), as well as your net business revenue.Net business revenue is the amount of profit your company has left over after paying off all its expenses. This number lets you know how well you’re doing at keeping expenses lower than revenues so you have a decent profit margin. You can look at your small business balance sheet to see both revenues and expenses to help you strategize how to increase net revenue.Here’s a quick snapshot of gross annual revenue vs. net business income.
Gross Annual Revenue
Net Business Income
Cash generated by a business before taking out expenses
Total earnings after accounting for any expenses.
Indicates how successful a business is at making sales
Indicates how financially healthy a business is
Types of Revenue
When determining your annual business revenue you’ll want to be sure you include the two main types of business revenue.
Operating Revenue
Operating revenue includes all of the sales from products or services you regularly sell. In the example above, the jewelry you sell falls under operating revenue. If you are a graphic designer, the logo or website design packages you offer fall into this category.
Non-Operating Revenue
This is money your company earns from non-sales activity, and can include:
Interest If your company offers financing to customers or invests in the stock market, the interest you gain from these transactions falls under non-operating revenue.
Dividends If your business invests in shares of another company, the profits you earn from this investment are part of your company's annual non-operating revenue.
Rent income If you rent property or equipment, the money you receive from these rentals is part of your annual non-operating revenue.
Asset and capital sales If you sell a piece of equipment to another company, then the sale price is part of your annual non-operating revenue.
Contra revenue Unlike the other non-operating revenue, contra revenue has a negative value. Contra revenue, which can include returned goods, unpaid invoices, and unsold inventory, is a deduction from gross revenue.
The Takeaway
As a small business owner, there are a lot of numbers you need to track. One of the most important is your annual business revenue. This number refers to the total amount of money your company makes during a year from the sale of products and services, plus any other additional income.Without knowing how much money you're bringing in, you won't be able to tell whether your business is profitable. Annual revenue is the starting point from which you can determine your net revenue, which tells you whether your company's sales are indeed exceeding its costs, and is making a profit.
Small Business Loan Tips
Generally, it can be easier for entrepreneurs starting out to qualify for a loan from an online lender than from a traditional lender. Lantern by SoFi’s single application makes it easy to find and compare small business loan offers from multiple lenders.
If you are launching a new business or your business is young, lenders will consider your personal credit score. Eventually, though, you’ll want to establish your business credit.
If you need to borrow money to cover seasonal cash flow fluctuations, a business line of credit, rather than a term loan, provides the flexibility you likely need.
Frequently Asked Questions
What is business revenue vs. income vs. profit?
How can you find your annual business revenue?
Why is annual business revenue important to know?
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Photo credit: iStock/dragana991
SOLC0122015
About the Author
Susan Guillory
Susan Guillory is the president of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and has been published on sites including Forbes, AllBusiness, and Cision. She enjoys writing about business and personal credit, financial strategies, loans, and credit cards. Follow her on Twitter @eggmarketing.
