The money that is earned by a company as a direct result of the sale of its products or provision of its services to customers in the ordinary course of that company’s business activities is referred to as sales revenue. In the Income statement or Profit and Loss Account of the company entity, it will be reported either annually, quarterlyly, or monthly depending on the circumstances.
It may be found at the very top of the income statement as the very first line item. It is a computation that, in the case of manufacturing enterprises, involves multiplying the number of units sold or produced by the item in question by the item’s typical sales price per unit.
Sales Revenue Formula
Sales Revenue formula= Number of Units Sold * Average Sales Price per Unit
For businesses that provide services, revenue is calculated as the product of the number of clients served and the average service price, which is shown as,
Formula for Sales Revenue: Number of Customers Served * Average Service Price.
It is crucial to remember that the revenue booked does not necessarily imply that all of the sales income has been paid out in cash. This income may be split into two parts: a piece that is paid in cash, and another that can be bought on credit using terminology like accounts receivable.
The revenue can also be divided into gross and net revenue. Gross sales do not exclude any sales returns or allowances but rather include all revenues and billings earned from the sale of products or services. Net sales, on the other hand, are calculated after deducting all allowances and refunds from gross sales.
How to Determine Sales Revenue
The following three steps are involved in calculating gross revenue for a manufacturing unit (revenue from sales):
- Let’s start by calculating the volume of units produced and sold during a given time frame, say a year.
- Let’s evaluate the average sales price per unit since demand, which serves as the foundation for the pricing function, drives the number of units produced.
- The revenue is then determined by multiplying the quantity of units sold (step 1) by the average unit sales price (step 2).
Examples of Sales Revenue
Take a tire factory as an example, which in 20XX produced 25 million tires for various vehicle classes. The business sold 5 million tires at an average cost of $200, 10 million tires at an average cost of $125, and 10 million tires at an average cost of $80 during the year. Identify the company’s revenue.
Sales are calculated as units sold multiplied by the average unit price—>Sales = number of units sold * Average sales price per unit
$3.05 billion, or $3.050 billion, is the total revenue.
Let’s say a mobile manufacturing business had an increase in monthly sales from 1,500 to 6,500 over the course of a year ending in November 2018. The function (7000 – x), where ‘x’ is the number of mobiles sold throughout the month, then controls the pricing function during each month.
Please be aware that in March 2018, there were 2,900 cellphone sales. Calculate the sales between November 2017 and March 2018.
The monthly revenue from sales may be computed using the information that is currently available as shown below.
- Monthly sales = x * (7000 – x)
- Monthly sales = 7000x – x2
Since mobile sales in March 2018 were 2,900 units, the total monthly sales for March 2018 may be computed as,
- Monthly revenue March 2018 = 7,000 * 2,900 – (2,900)2
- Monthly revenue March 2018 = $11,890,000 or $11.89 million
Again, during November 2018, mobile sales increased to 6,500 units. Therefore, the monthly sales for November 2018 may be estimated as follows:
- Monthly revenue November 2018 = 7,000 * 6,500 – (6,500)2
- Monthly revenue November 2018 = $3,250,000 or $3.25 million
Efficacy and Relevance
Even while profit may be the smaller businesses’ primary concern, another financial word is just as significant. Profitability alone cannot convey the business’s performance in a way that can be used to make decisions. By appreciating the significance of revenue measurement, one may get the most out of the company information.
It assists in studying sales trends over time, which helps business owners better understand their industry. One advantage of monitoring revenue is to analyze daily sales patterns to determine if there is a consistent pattern in consumer behavior. Additionally, a business owner can determine a correlation between sales volume and seasonality by looking at monthly income from sales patterns. Finally, the management can decide to increase production or support the sales price per unit based on this income trend by controlling the sales volume in accordance with the client profile, seasonality, etc.