Author: Jim Riley Last updated: Sunday 23 September, 2012
Finance - Understanding Business Revenues
A business exists to provide goods and services. Those products are sold to customers. When a customer buys a product, that transaction becomes a sale for the business. That’s what businesses do – they make sales.
The value of sales made is the revenue of the business.
You will come across some different ways of describing sales. Alternative terms for “sales” include:
Revenue (the official accounting term)
Takings (often used by retailers)
So we know that sales arise through the trading activities of a business. How are sales measured?
The value of revenue in a given period is a function of the quantity of product sold multiplied by the price that customers paid. Total revenue can be calculated by this formula:
Total revenue = volume sold x average selling price
A business that wants to increase revenue needs to either:
Increase the amount or volume sold (higher quantity),
Achieve a higher selling price,
Or (ideally) both of the above!
To see how the revenue formula works, let’s look at an example.
Sheila runs a web design business. Her budgeted revenue for next year is as follows:
Number of jobs
Average value per Job
In the example above, Sheila is budgeting to achieve total revenues of £69,500. These sales come from a total of 26 jobs, with an average selling price per job of £2,673.
How might Sheila do better than her estimated revenue for next year?
Winning more jobs might help, although 26 jobs already looks a lot of work. Sheila may find it hard to handle higher sales volumes, unless she is able to raise capacity by employing extra designing or outsourcing elements of the work.
In Sheila’s case, the solution to higher sales can probably be found in the average selling price achieved. By focusing on smaller number of higher-value jobs, Sheila may be able to increase revenues and deliver a better service.
For example, if Sheila did just 20 jobs next year (6 fewer than budget) at an average price of £4,000 per job, then her total revenues would be £80,000 (20 x £4,000), an increase over the existing sales budget of £10,500.
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