In the world of business and finance, understanding the differences between gross vs net revenue is crucial for making informed decisions and evaluating the financial health of your company. These two revenue numbers play a significant role in normal business operations, as well as in securing business financing. In this article, we will explain the differences between gross revenue and net revenue, provide examples for clarity, and discuss their relevance to business financing.
Gross Revenue: A Top-Line View
Gross revenue, also known as gross sales or total revenue, refers to the total amount of money a company generates from its sales before deducting any expenses, taxes, or discounts. This top-line view represents the company's ability to generate sales and serves as a starting point for evaluating the company's overall financial performance.
For example, if your business sold 1,000 units at $50 each, your gross revenue would be $50,000.
Lenders often use gross revenue as a qualification metric for business loans, as it reflects the company's ability to generate income from its products or services.
Net Revenue: A Bottom-Line Perspective
Net revenue, on the other hand, is calculated by subtracting the costs associated with generating the revenue from the gross revenue. These costs can include discounts, returns, allowances, and taxes. Net revenue gives a more accurate picture of the company's actual earnings, as it accounts for the expenses involved in doing business.
Continuing the example above, if your business offered a 10% discount on 200 of the 1,000 units sold and incurred $2,000 in taxes, your net revenue would be:
($50,000 - ($50 * 0.10 * 200)) - $2,000 = $50,000 - $1,000 - $2,000 = $47,000
When to Use Gross Revenue vs. Net Revenue
Both gross revenue and net revenue are important financial metrics that serve different purposes:
Gross revenue is useful for tracking the company's overall sales performance and growth, as well as for setting revenue targets and evaluating marketing effectiveness.
Net revenue is critical for assessing the company's profitability, efficiency, and cost management, as well as for making decisions related to pricing, expansion, and investment.
The Importance of Gross and Net Revenue in Business Financing
When it comes to business financing, lenders typically rely on gross revenue to qualify a business for a loan. This is because gross revenue represents the company's sales potential and its ability to generate income. However, net revenue can also influence the loan offer if profits are low or negative.
For example, if your business has a high gross revenue but low net revenue, it may indicate that your company is struggling with cost management or has a low-profit margin. In this case, lenders may offer a lower loan amount or charge higher interest rates to account for the increased risk.
In conclusion, understanding the differences between gross revenue and net revenue is essential for making informed financial decisions and securing the best possible business financing options. By accurately tracking both gross and net revenue, you can identify areas for improvement, optimize your operations, and strengthen your company's financial position for future growth. If you want to see where you stand for business financing you can get a free preapproval on our website here or apply online and have an offer within 24 hours!