Gross Revenue vs. Net Revenue
Last Updated: By Michaela Dale
The business potential of startups and their investment needs can be analyzed using different financial metrics such as gross revenue and net revenue. While they may seem similar at first glance, each has distinct definitions and can be used in different ways to interpret a company's financial position.
In this guide, we break down the key differences between gross and net revenue as well as other important financial metrics, including net income, gross profits, and net profit margins.
What's the Difference Between Gross Revenue vs. Net Revenue?
There are a few key differences between gross and net revenue. A business's gross revenue is a measure of the total money accumulated over a specific financial period from selling its goods or services. All the gross sales made by businesses in sales of goods fall under the gross revenue umbrella.
Comparatively, net revenue is what remains from the gross revenue after you subtract direct expenses, which include returns, discounts, and allowances, as well as the cost of goods sold. Think of it as the money a company actually gets to keep from its sales after removing the amounts for products that were returned or sold at a discount.
Gross Revenue Reporting
Gross revenue reporting is the process of documenting the total income generated by a business before any deductions are made. After you calculate gross revenue, this number will represent the total revenue from all revenue sources within the time period being assessed. This may include gross sales, services, interest, dividends, and any other applicable income streams.
Gross revenue is reported without subtracting any expenses or costs, whether that be taxes, goods sold, or operating expenses, this is the key difference between gross and net revenue.
What Is the Difference Between Gross Revenue and Earned Revenue?
Gross revenue, as noted above, is the total income a business generates from activities before any business expenses are deducted. Alternatively, earned revenue refers specifically to income a business receives from activities that are directly related to its primary operations.
Earned revenue is a subset of gross revenue that focuses more narrowly on core business activities, whereas the company's gross revenue provides a more holistic metric of the overall financial size and scope.
What Is the Difference Between Gross Revenue and Gross Profit?
Gross profit or gross income is calculated specifically by deducting the cost of goods sold from the gross revenue. The cost of goods sold can be material costs or labor costs, for example. Gross profit is important as it provides insight into the direct costs associated with producing the business's goods or services, depicting the business's level of efficiency.
Net Revenue Reporting
Net revenue reporting represents the actual revenue a company retains after deductions, including returns, allowances, and discounts, as well as the cost of goods sold from its gross revenue.
Unlike gross revenue, which is simply the sum of all income sources, net revenue subtracts all relevant expenses such as taxes, cost of goods sold, etc. This provides a more realistic perspective on the company's financial health by illuminating the effectiveness of sales and marketing strategies as well as how lean operations are being run.
What Is the Difference Between Net Revenue and Net Profit Margin?
While net revenue accounts for the income made by a business after subtracting returns, allowances, and discounts, net profit margin takes this a step further to determine the net earnings rather than the revenue alone. Net profit margin is a percentage that essentially shows how much of every dollar of net revenue is converted into profit.
There are a few takeaways that can be derived from this number, including the amount of revenue being generated and how efficient the business is at managing costs and expenses.
Gross Revenue vs. Net Revenue Example
Here's a hypothetical example that illustrates the differences between gross revenue vs net revenue:
A hypothetical company's finances in a given financial year:
- Total Sales Revenue: $1,000,000 (this would equate to gross revenue, as it is the amount of all income before any deductions)
- Returns and Allowances: $50,000 (this represents any refunds given to customers for returned goods or defective products)
- Discounts Given: $20,000 (this entails any price reductions given either for promotions or bulk sales)
To calculate the net revenue from this information, you will need to subtract returns, allowances, and discounts from the gross revenue.
- Net Revenue: $1,000,000 - $50,000 - $20,000 = $930,000
- Gross Revenue: $1,000,000
