There are several forms of revenue, including net and gross revenue, as well as profits from various revenue sources. To calculate revenue, you need to combine sources of income or revenue streams to find a total revenue number.
Total revenue is the amount of money that a business receives from the sale of its goods and/or services over a period of time (e.g., month, year). Microeconomic theory typically assumes businesses are attempting to optimize the gap between total revenue and economic costs.
A declaration of income starts with an analysis of all revenue sources for a given time before the cost of products sold and operating expenditures are subtracted. It should be known that total revenue also goes by “gross revenue.” Those two terms are used interchangeably.
How to Calculate Total Revenue
The gross revenue of your business for the month, quarter, or year is the overall income before you begin to deduct expenses. Total revenue can include sales alone, or it can consist of investment interest and dividends.
For service industries, revenue is the average price of services rendered multiplied by the number of customers. However, if you have the data, you can measure it based on individual consumer transactions or product lines, in as much detail as your data supports.
One can calculate total revenue by multiplying the price per product by the total number of units of that product that were sold. Here is the formula for total revenue.
Total Revenue = P x Q
“P” refers to the price per unit of that product, while “Q” refers to the quantity sold during the period you’re calculating for. Say, for example, a baker who sells cakes for $10 per piece. If she regularly sells 100 pieces of cake per month, her total revenue is $1,000 ($10 x 100 = $1,000).
The Purpose of Knowing the Total Revenue
This formula is especially useful when the baker considers reducing its prices to $8 a piece to raise sales. If she sells the same quantity every month, her total revenue will be reduced to $800 ($8 x 100 = $800).
With the same formula, the baker will also calculate how many more pieces of cake she will need to sell to obtain the total revenue amount before the discount. She can do it by dividing her previous total revenue by her discounted price.
$1,000 (Total Revenue) = X (Quantity Sold) x $8 (Price)
Quantity Sold = Total Revenue / Price
Quantity Sold = $1,000 / $8
Quantity Sold = 125 pieces of cake
The baker consequently knows she has to sell at least 125 pieces of cake to achieve her total revenue before discounting. If she feels the discount is going to pull in far more orders than that, it might be a smart decision for her.
This decision is based on the business owner’s clear understanding of the market price for cakes, such as those she bakes, as well as the scope of her target market.
Finding the Profit
Also, once you have the total revenue, and you know your total cost, too, you can calculate the profit. Subtract the total cost out of your total revenue to find the figure. The equation for that looks like this.
Profit = Total Revenue – Total Cost
Why Is It Important to Business Owners?
The details of how the baker will handle the increased demand for her cakes, if she wants to give the discount, are what the previous example leaves off.
Will the cost of baking each cake go down with the increased volume? Will she have to hire a new baker to better satisfy demand? Is it going to slow down production time?
The Bottom Line
When pricing products or services, there are plenty of downstream factors to consider. One of the common business tips is to calculate the total revenue.
The total revenue formula provides business owners with a place to start when considering their pricing. It’s also necessary to calculate the total revenue to assess the business’ profit.