What does net revenue mean?

Revolut Contributor

 · 07/20/2020  · 07/20/2020

Net revenue describes the total amount of revenue a business records for a given period, once it deducts the costs of discounts or refunds that relate to these transactions over the same period.

This net figure is said to provide a more realistic measure of revenue, especially for a business which relies on promotions or prone to product returns, such as online retailers due to distance-selling rules.

What is the difference between gross revenue and net revenue?

Let’s begin with a recap of revenue itself. In simple terms, it’s the total income a business generates from ordinary activities over a period. This typically means the income received from selling goods or services as opposed to, say, profits made on capital investments or a one-off transaction unrelated to its core business.

Revenue is often called sales turnover and, broadly speaking, these two terms mean the same thing. We cover the precise distinctions here and show how to work out revenue here.

Many people describe revenue as the number of units a business sells (or the number of customers) multiplied by the price of its goods or services. However, this is rarely the whole story. This basic calculation is only the gross revenue, as it does not take into account several real-world factors which affect the income received.

Let’s take an example. Avocado Ltd is a fictional business that makes and sells fruit-shaped furniture in London. In 2019, Avocado runs a Black Friday promotion of a 50% discount voucher on banana beds, which retail for £500 at full price. It also has a money-back guarantee when a customer is not satisfied. Avocado sells fifty banana beds at this lower price, ten units of which are later returned.

The total sales revenue (i.e. gross revenue) does not reflect the campaign discount nor these refunds. The business must deduct both of these costs from its gross revenue figure to reveal the net revenue. For SMEs, this distinction is often academic but for retailers or brands that frequently discount their products, such as those which supply to supermarkets, it’s a crucial number on financial statements.

Net revenue = Gross revenue – Discounts – Refunds

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