Gross Revenue vs. Net Revenue

Understanding the financial health of your business is key to your success. Both gross revenue and net revenue are financial metrics that offer insights into your company’s financial health, but from different perspectives.

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.

What Is Gross Revenue?

Gross revenue, often referred to as gross sales or total revenue, is the total amount of money generated from your business over a period of time — usually a quarter or a year. Gross revenue includes all sales revenue, without considering any costs or deductions related to those sales. Gross revenue gives a raw outlook on the earning potential of a company’s goods or services, serving as a top-line figure on the income statement.

What Is Net Revenue?

Net revenue, also called net sales, is the amount of money that remains after subtracting your company’s direct costs from its gross revenue. These costs can include the cost of the goods or services sold, discounts, returns and allowances. Net revenue offers a more accurate reflection of your company’s income — and your company’s profitability — because it accounts for the expenses directly tied to revenue generation. Net revenue does not account for all business expenses like overhead and administrative costs.

How Is Gross Revenue Different from Net Revenue?

The key difference between gross and net revenue lies in the expenses accounted for in their calculations. Gross revenue is a broader metric, representing the total income from sales without any deductions. Net revenue narrows down this figure by subtracting specific direct costs associated with making those sales. Essentially, gross revenue shows the total sales volume, while net revenue reveals what part of that volume contributes to profit after covering direct selling expenses.

How Do You Calculate Gross Revenue?

Calculating your company’s gross revenue involves adding up all sales of goods and services within a period of time. The calculation does not consider any costs related to these sales. Here’s the formula:

Number of Units Sold x Price per Unit = Gross Revenue 

For example, if your business sells 100 products at $50 each in a month, your gross revenue for that month would be $5,000 calculated like this:

100 x $50 = $5,000

If your business is service-based, multiply the number of services sold by the price per service to calculate gross revenue. If your business is subscription-based, multiply your number of customers by the price of your service.

How Do You Calculate Net Revenue?

To calculate net revenue, you start with the gross revenue and then subtract the direct costs related to the production and sale of your goods or services. These costs can include the cost of goods sold (COGS), returns, discounts, and allowances. The formula looks like:

Gross Revenue – (Returns + Allowances + Discounts + COGS) = Net Revenue 

For example, if you have gross revenue of $5,000, returns and allowances of $500, discounts of $200, and COGS of $1,000, your net revenue would be $3,300 calculated like this:

$5,000 – ($500 + $200 + $1,000) = $3,300

This figure provides a clearer picture of what’s truly contributing to your business’s profitability.

Is Revenue Gross or Net?

The term “revenue” in financial reporting can refer to either gross or net revenue, depending on the context. Generally, when people just mention “revenue,” they are referring to gross revenue. However, it’s important to clarify whether you’re discussing gross or net revenue, as each serves different analytical purposes. Gross revenue highlights the total sales performance, while net revenue gives insight into the efficiency and profitability of those sales.

Are Investors Interested in Gross or Net Revenue?

Often, investors will be more interested in your gross revenue because it shows your businesses’ ability to generate sales and potential for growth. For example, 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 to see where you can and cannot cut costs to make your business more efficient — and where you have greater profit-generating opportunities.

Are Small Business Lenders Interested in Gross or Net Revenue?

Most lenders 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.

Related Financial Terms

While gross and net revenue are essential financial terms to know, they don’t give you the whole picture of your business performance. It’s important to consider related income metrics and how they connect to one another to understand your full financial performance. What’s considered a good profit margin varies by industry.

Gross profit: Also known as sales profit or gross income, gross profit is the difference between a company’s total revenue from sales and the cost of goods sold (COGS).

Gross profit margin: Expressed as a percentage, gross profit margin is calculated by dividing the gross profit by the total revenue.

Net profit: Also called net earnings or net income, net profit is calculated by subtracting cost of goods sold, operating expenses, taxes and interest from total revenue.

Net profit margin: Expressed as a percentage, net profit margin is calculated by dividing net profit by total revenue.

The Bottom Line

Understanding the difference between gross and net revenue is essential for small business owners. It not only helps for accurate financial reporting, but also for decision-making. By mastering these concepts, you can better navigate your business toward financial success and sustainability.