When you don’t track revenue growth, you can’t fully identify what works and what doesn’t in your business. That’s why it’s essential to understand your tech organization's revenue streams and revenue generation.
It’s easy for startup companies to make the mistake of grouping all incoming funds under the same umbrella. This results in an income statement with no detail on where the money came from — and that’s a surefire way to harm your ability to scale.
Tech companies typically have diverse revenue streams and many moving parts, and everything must be organized. You need to itemize, tag, and report incoming money based on what products or services generated your incoming capital and profits. This gives you financial statements that paint a clear picture of your gross income for each revenue stream.
So what is revenue? This article breaks down the definition, the formula to track it, and how it’s different from other monetary itemizations.
First, let’s break down the exact definition of revenue.
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What Is Revenue: A Definition
Revenue, also known as sales or gross income, is the top-line or gross figure of income. It’s usually front-and-center on all financial statements. Simply put, it’s the total amount of money a company earns. This goes for any type of business — both for-profit and non-profit organizations.
Is revenue an asset? Not exactly. To determine your assets, look at your company’s income statement. You need to calculate revenue (gross sales) minus deductions and costs: the result equals your resulting assets, a.k.a. a company’s net sales or net income.
When that figure exceeds your debts, you have positive revenue.
There are several subcategories in the revenue spectrum, such as accrued and deferred revenue as well as unearned revenue.
If a good or service has been sold but not yet paid for, that’s known as deferred or accrued revenue. Accrual accounting helps to determine these figures. We’ll talk more about this later.
Conversely, unearned revenue is income generated by the sale of goods and services that have not yet been delivered by the company. Examples include prepayments like mortgage/rental income or deposits made toward final payment.
Whatever the type of revenue (and we’ll get deeper into those later), specific revenue must be generated for any company to justify its operating expenses.
Without detailed company reports, you won’t have a clear picture of what it takes to work efficiently with all costs covered.
It may sound complicated, but calculating your revenue is pretty simple and an integral part of normal business operations. The section ahead addresses the revenue formula and the best way to calculate your baseline revenue.
Examples of Revenue
Revenue refers to income derived from selling goods (such as an e-commerce store) or services (such as software subscriptions).
In the tech industry, there are thousands of ways to generate revenue. Some of the most common examples include:
Hardware sales (computer, components, modems, etc.)
Subscription services to software
Recurring maintenance or service fees
One-time maintenance fees
Product royalties
The sale of old equipment you no longer use
In the tech business, it’s also possible to earn advertising revenue by collaborating with other companies or allowing them to advertise on any medium or platform. One example is software integration with products that are complementary to yours.
How to Calculate Revenue: The Revenue Formula
When calculating revenue, you take the standard or average price of each good or service sold and multiply that by the total number of units sold to calculate revenue. The revenue formula is simple:
Revenue = Price x Quantity
Let's say you have a piece of hardware or a USB drive that sells for $25 each, and in a given month, you sell 100 of them.
To find out how much money was made from selling these items, we need to multiply $25 x 100. This gives us $2500 in total revenue on our product line for this month.
If you have many different categories or products, you could calculate the average price when determining your revenue, but this may result in an oversimplified view.
Seems too simple? Since this is just the gross figure of all money coming in, expenses don’t factor in — so it really is that simple!
Now that you know the formula, how do you break it down over the course of doing business?
Revenue is generally tracked according to fiscal quarters. This includes government revenue reporting and publicly traded companies, which fall under the direction of the securities and exchange commission.
Reporting revenues in quarterly increments makes it easier to gauge a company’s financial health and top-line results while measuring its overall financial performance throughout the year.
Since incoming money should be categorized based on how it’s generated, the next step to optimizing your revenue recognition strategy is to understand the different types of revenue.
Revenue vs. Net Income
Revenue and net income are both part of a company’s core business operations and are critical factors in measuring its success, but they are not identical.
Remember that revenue is just the gross amount of money your company generates from the sale of goods or services delivered during a given period.
For example, say you own a restaurant. Your business sells $100 worth of food per day for one month. So, your total monthly revenue would be $3000 ($100 x 30 = $3,000).
After calculating revenue, a company’s net income is determined by subtracting total expenses (both fixed costs and non-recurring costs) from total revenue:
Net Income = Total Revenue - Total Expenses
So in the restaurant example, take that top-line revenue figure of $3,000 and subtract expenses, sales taxes, etc. The resulting figure is your net income for the month.
Take note: income taxes are not included in the net income equation. Instead, they are factored into the liabilities category of the income statement.
Revenue vs. Cash Flow
A company’s revenue is different from cash flow. While the former is about gross incoming cash/payments, the latter refers to how much cash flows both into and out from a company. You’ll find both on your company’s income statement, as well as gross receipts, operating income, operating expenses, and more.
Your cash flow is the total amount of usable funds on hand compared to liquid cash. It can be calculated using your income statement and profit and loss sheet.
When dealing with deferred income, know that all of the money you expect from a subscription isn't included. Instead, it shows only what was cleared and acquired during the statement period.
In corporate finance, having a clear picture of your cash flow and cash balance is essential. Why? It’s no different than cash flow related to personal finance. Cash flow tells you if there will be enough money to pay bills like rent, payroll, and taxes.
Operating Revenue vs. Non-Operating Revenue
Businesses rarely have only one form of revenue. All those different categories on your company’s income statement may be confusing, but the accounting method you use will determine how to break down your revenue. Let’s have a closer look.
Operating Revenue
Operating revenue includes the money generated from goods or services sold directly to customers. These proceeds directly result from your organization’s primary product or service.
Operating revenues do not take into account any operating expenses attributed to selling goods and services. Remember that revenue is a gross number! That means it doesn’t deal with operating costs and expenses the way operating income does.
For a tech company, operating revenue could include any number of things. It could be the computer items you manufacture, your IT or cloud services, your data backup package, or anything else that goes directly from you to the consumer or business.
Non-Operating Revenue
Non-operating revenue sources include any sales transaction that is distinct from your primary products or services, but that still affects your top-line income statement. This additional income could be made up of dividend income, interest income, royalties, asset markdowns, and other forms of capital.
A common form of non-operating revenue in the tech business is licensed intellectual property from software services. Other types exist depending on the specific type of company you operate.
Recurring, Non-Recurring, and Deferred Revenue
It’s also important to understand what types of your business revenue occur regularly, are one-off sources of revenue, or aren’t immediately recorded on your financial statement. Let’s break it down.
Recurring Revenue
This is the most common form of direct revenue, and this refers to payments that occur at routine intervals. Regular subscriptions for software or firewall maintenance are typical examples of recurring income in the tech field. But you can’t count sales that don’t occur regularly in your recurring revenue — that’s where non-recurring revenue comes in.
Non-Recurring Revenue
Any one-off sale or single sale is non-recurring revenue. This is a one-time product fee or service that a client pays for upfront.
It’s possible to transition non-recurring revenue into recurring by including different subscriptions as upsells. Offering maintenance on hardware products is another great way to accomplish this.
Deferred Revenue
This is when businesses offer services prior to receiving payment.
For example, when someone signs up for an annual contract with a cloud storage provider like Dropbox, they might get 30 days free before the company charges membership fees. Legal services are another industry where deferred revenue is common.
This type of revenue sits in accounts receivable, where it’s typically listed as incoming revenue during the period when the customer pays.
This approach is uncommon in merchandise sales. it’s typically reserved for service-based offerings, rather than goods sold.
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The Bottom Line: Revenue Matters For Your Business
Understanding and calculating your company's revenue will help you keep track of your company's finances and measure the success of your products or services. This allows you to scale your company.
Be careful when assessing your revenue! Remember that you must calculate and categorize each type of revenue correctly to determine top-line growth.
By itemizing the various forms of revenue (recurring, deferred, etc.), you can better understand what offerings are garnering the highest ROI. Once you understand this, optimization becomes much easier.
With this knowledge, you'll have the ability to fine-tune your most powerful profit strategies.
To learn more about how to make the most of your revenue and generate more of it, reach out to the team at Scorpion.
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