Understanding total revenue is essential to determine the health of a business before costs and expenses are taken out. Total revenue is the value of total units or services sold at a specific price over a period of time. Total revenue is also known as ‘gross revenue’ or ‘total sales’, reported at the top of a company’s income statement in their financial reporting. It includes all income streams for the company, which may not only be from their primary product or service.
Calculating total revenue can help business owners determine how to price their goods depending on their goals. Prices may need to be raised if unit or service volume is fixed, such as for independent contractors who work by the hour. It can also help in forecasting future revenue by revealing current demand.
This article will show you the total revenue formula, how to calculate step by step, and give you examples on how it can be applied in different situations.
Formula
Total revenue = (price per units sold) x (number of units sold)
Total revenue is calculated by multiplying the number of units sold by the price of those units. For services businesses, you would replace the number of units with number of services. Total revenue is formatted as a dollar value.
Calculation Step by Step
- Determine the total amount of units (or services) sold over your chosen time period.
- Collect the individual prices of the units
- Multiply price by the number of units
Example
A sports store has sold 25,000 shoes for the year. Each shoe cost $40.00.
To solve for total revenue;
25,000 x 40.00 = $1,000,000
The sports store has made one million dollars in total revenue for the year.
Tips for Solving Total Revenue
Tip Number 1:
For the most accurate calculation, differing products or services should be priced individually, rather than taking an average. One or two high priced goods could cause an excessive shift in your total revenue result.
Tip Number 2:
Prices may have also fluctuated over the period of time you are assessing; this is especially true for fast-moving consumer goods industries or other markets with high price competition. If the price is accurately recorded against each unit sold, you will be able to capture an exact total revenue figure.
Tip Number 3:
Don’t forget to include other income sources in your Total Revenue figure that may not be directly related to the primary function of the business. For example, income can come of the form of stock dividends, interest, royalties or real estate rentals.
Calculating Total Revenue in Excel
Example 1
To calculate total revenue in Microsoft Excel, let’s take an example from a fictional business, Kristoff’s Hair Salon.
The owner wants to calculate her total revenue for the month of January.
The owner had previously recorded the number of services performed for the month and their corresponding price. To calculate the revenue for each service offered we put the following formula in cell D4:
=B4 * C4
Copy the formula down Column D.
To calculate total revenue, enter the formula below into cell D10:
=SUM(D4:D8)
This gives the owner’s total revenue for the month of January, $50,050.00.
Where to Find Total Revenue: The Income Statement
If you are interested in evaluating a business, whether it buy the total business, or stock in it, total revenue is the place to start. It signifies demand for the products it sells compared to its competitors.
The total revenue is recorded on the Income Statement, a history of how the business performed over a period of time (typically one year).
Let’s take the electric car company Tesla (TSLA) as an example;
Source: Yahoo Finance
The total revenue is always located at the very top of the income statement. By comparing the figure versus past years, we see that Tesla has been consistently growing its revenue every year. Once we know the total revenue, we can then calculate the profitability of a company one we account for cost of the product and expenses related to business operations and promotional expenses.
Final Word
Total revenue is a relatively straightforward calculation that can be used to make many critical business decisions, and directly relates to the financial viability of a company. It determines how much money has been earnt over a period of time from its goods and/or services and includes other income streams, such as interest or dividends. Knowing a company’s total revenue also gives you an understanding of the level of demand for its products; a business with a larger total revenue than its competitors is more often than not the market share leader for its category. It also means the business may have better ability to cover its own expenses, if they can keep the cost of its operations low enough. In conclusion, a high total revenue is a good indicator that a company will be able to continue its operations and remain profitable for the foreseeable future, pending external market conditions.