Gross revenue vs. net revenue, explained:
Simply put, your gross revenue is your earnings before you deduct your expenses and your net revenue is your earnings after you subtract your expenses.
Understanding the difference between your gross revenue and your net revenue will tell you how successful you are at controlling your expenses… and generating profits.
It’s important to understand all the costs associated with doing business, including the cost of goods sold, the lease on your business location, employee payroll, and even incidental expenses like paper supplies or your utility bill.
Why is this difference important?
Often investors will be more interested in your gross revenue because it shows your businesses’ ability to generate sales and potential for growth. If your business just opened a new location, gross revenue can be a far more useful metric than net revenue because it indicates potential without the clouded judgment of the one time cost of opening that new location.
This does not mean you can afford to discount the importance of net revenue (your actual profits). This is the best way for you, as a business owner, to make decisions of cost and worth. Even if a product or service is bringing in a lot of revenue, you can see after deducting all the expenses associated with that product, whether or not it is a profitable product or service for your business. Often you will be able see where you can and cannot cut costs to make your business more efficient—and where you have greater profit-generating opportunities. To learn more about ways to trim costs at your company, check out “5 Ways You’re Losing Money – And How to Gain it Back.”
How is this relevant to business financing?
Most lenders, from your local bank to the SBA to online lenders like OnDeck, look at gross revenue as a minimum qualification requirement for small business loans. This means that like most investors, they want to know more about your potential for bringing in capital to your business. This helps lenders determine how much money is appropriate to lend to a particular business while using your business credit, personal credit, and cash flow to determine your ability to pay the loan back. You’ll want to make sure you understand your net revenue to determine how easily or difficult it will be to service the debt.
I hope this helps you understand gross revenue vs. net revenue.