What Is Revenue?
Revenue is the amount of money a business receives in exchange for the products and services it sells. However, revenue can be split into two main categories: operating and non-operating. Operating revenue refers to the money generated from day-to-day business activities, whereas non-operating revenue refers to one-time events, such as the sale of a subsidiary to another party or realizing a gain on an investment.
Not to be confused with income or profit, revenue does not take into account expenses. A company with extremely high revenue isn't necessarily profitable.
Why Does Revenue Matter?
Revenue is one of the primary drivers of scalability. Increasing revenue suggests a company is doing well as there is a continuous demand for its products or services. On the other hand, declining revenue is a sign of a business that may be in trouble. It indicates there may be issues with a company's strategy, the cost structure could be ineffective, or there may be more competitive offerings popping up that could inevitably make a business obsolete.
This also highlights an important consideration for companies who want to attain investment. Outsiders view revenue growth as one of the key indicators to weigh, whether it's an investment fund, an angel investor, or even retail investors on the public markets. They want solid long-term returns from successful businesses with sustainable revenue growth. Investing in the opposite would be taking a punt on a business that is plateauing and could eventually face the risk of bankruptcy.
How To Use Revenue To Measure Success
Revenue generation is often the "North Star" or primary metric focused on by businesses when measuring success. If a business can repeatedly bring in more sales from new customers and increase spending from existing customers, it will achieve more control. It will be reflected in total market share and profitability as time passes.
How To Calculate Revenue
More often than not, revenue calculations are made monthly, quarterly, and annual. Two common terms that will crop up repeatedly are monthly recurring revenue, or MRR, and annual recurring revenue, or ARR. This accommodates seasonal changes where companies may achieve higher or lower sales than other periods throughout the year. It makes it much simpler to judge how much a company is truly growing on a year-on-year basis. Additionally, businesses can make necessary preparation and strategize how to improve on their previous results.
Common Mistakes With Revenue Analysis
A revenue template and analysis will look at the amount a company is currently bringing in from each business segment. Common mistakes can relate to overestimating and underestimating current and future forecasts.
Businesses should use all the available data points to come to solid conclusions rather than random guesses. Some common methods are considering the historic performance of segments, the churn rates, customer acquisition rates, the total addressable market, and how pricing strategies will impact total revenue.
Revenue is the main driver of growth within any business and should be prioritized as such. Once a company has defined a successful business model built to scale, it has the potential to grow earnings exponentially.