Gross Revenue Vs. Net Revenue: Learn The Difference
Having a solid understanding of the differences between gross revenue versus net revenue is crucial to the success of your business. In short, gross revenue entails the total amount of profit your company made over a certain time period, while net revenue accounts for the profit you made minus any expenses associated with the manufacturing and selling of your product or service. Whether you want to expand your business, invest in new equipment, or stock up on inventory, having a complete picture of your total revenue can help you to make smart business decisions.
What Is The Difference Between Net and Gross Revenue
Discover the difference between net and gross revenue.
What is Gross Revenue?
Gross revenue is the total amount of earnings over a reported period. Gross revenue accounts for the sales made from products or services rendered. It does not include any deductions like returns, wages, or utility costs. The reported pay period could account for a monthly, quarterly, or yearly time frame.
Take this example, for instance: The owner of a lemonade stand sold 1,000 cups of lemonade at $2 per cup. The gross revenue (or gross sales) equals $2,000.
What is Net Revenue?
Net Revenue is the amount left over after discounts, returns, and other operational expenses are subtracted from the gross sales amount. To summarize, gross revenue is the amount of sales made prior to any deductions. On the other hand, net revenue finds the gross profit by accounting for any expenses related to the production of a good or service.
Here Is an Example:
Gross revenue and net revenue can be illustrated with a look at our previous lemonade stand example. We’ll follow this basic formula below.
- Gross revenue – Expenses = Net revenue
We already know that the gross revenue from the lemonade stand is $2,000, but to calculate net revenue, we need to deduct expenses. Expenses can include inventory costs, rent, utility bills, employee salaries, sales tax, cost of supplies, interest on borrowed payments, and more.
In this basic example, let’s say that for every 1,000 cups of lemonade sold, the owner must pay $500 for lemons, sugar, and cups. If the gross revenue was $2,000, then you need to subtract $500 from that amount to find the net revenue (gross profit), which equals $1,500.
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Why it’s important to learn the difference between net revenue and gross revenue?
There are numerous reasons why it’s vital to learn the difference between net revenue and gross revenue. For one, gross revenue is a metric that can help you gain insight into your company’s earning potential over time and its ability to generate revenue. Keep in mind that gross revenue is simply one part of the equation and doesn’t reflect the totality of a business’ real-life situation. Other factors like supply chain issues or fluctuations in demand can impact your gross revenue from year to year.
For a more realistic picture of your company’s financial health, it’s necessary to calculate net revenue. While gross revenue may be high prior to deducting any business-related expenses, net revenue can determine which areas of your business are doing well or where you may need to reevaluate. For instance, rising rental costs or increased refunds for a specific product could be draining your bottom line. Once you nail down net revenue, you’ll be able to see whether you’d qualify for specific loans or revenue-based financing.
How Does Gross Revenue & Net Revenue Relate to Revenue-Based Financing?
When applying for revenue-based financing for your business, gross revenue and net revenue will play a role in your application, as the two go hand-in-hand. Gross revenue indicates the potential sales earnings your business can generate over a certain period of time. Using this information, lenders can decide how much capital to lend.
Net revenue is also important, as it showcases whether or not your business has the ability to make payments. Aside from gross revenue and net revenue, lenders also look at other factors when determining your eligibility for revenue-based financing, such as: having a stable cash flow, operating in a stable market, and having the ability to expand to other markets.
At Mantis Funding, our revenue-based financing options provide more flexibility in terms of repayment and have less stringent requirements than traditional lenders. Some of our eligibility requirements include:
- Your business has been operational in the U.S. for at least 6 months.
- You own at least 50% or more of the business.
- You can pass a minimal credit score check — low credit scores are ok!
Educating yourself on gross revenue and net revenue can help you to make better business decisions and plan for the future. At Mantis Funding, we’ll help you get the most out of your revenue-based financing options. Simply fill out an application for funding today to get started!
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Mantis Funding is a business financing solutions firm catering to small and mid-sized business owners in the United States.