Revenue

Definition

Revenue refers to the total amount of money earned by a company from its normal business activities over a specific period. 

What is revenue?

Revenue, also known as “sales” or “income,” represents the top line of a company’s income statement and is calculated by multiplying the quantity of goods sold or services sold by their respective selling prices. It does not include any deductions for costs or expenses associated with producing or delivering the goods or services.

Revenue is typically recorded on an accrual basis, meaning it is recognised when goods are delivered, regardless of when payment is received. Revenue can also be measured on a cash basis, where it is recognised only when cash is received from customers.

Types of revenue:

• Operating revenue: This is the revenue generated from a company’s primary business activities, such as selling products or providing services.
• Non-operating revenue: This includes income generated from sources other than the company’s core business operations, such as interest income, dividends, or gains from the sale of assets.

Components of revenue:

• Product sales: Revenue generated from the sale of tangible goods produced or purchased by the company.
• Service revenue: Revenue generated from providing services to customers, such as consulting, maintenance, or subscription-based services.
• Other revenue streams: This may include licensing fees, royalties, rental income, advertising revenue, or any other sources of income not directly related to product sales.

Revenue is a key indicator of a company’s financial health and performance. Higher revenue typically signifies growth and success in the market. This means that Investors often use revenue figures to evaluate a company’s growth potential, profitability, and overall attractiveness as an investment opportunity.

Furthermore, revenue figures play a crucial role in determining the valuation of a company, particularly in the case of mergers, acquisitions, or initial public offerings (IPOs).

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Example of revenue

ABC Company, a software development firm, sells licenses for its new productivity software to businesses and individuals. In a given quarter, ABC Company generates £500,000 in revenue from the sale of software licenses. This revenue represents the total income earned by ABC Company from its software sales during that period.

In this example, the £500,000 in revenue reflects the money received by ABC Company from selling its software licenses, which constitutes a significant portion of the company’s total income for the quarter.