This lesson discusses the importance of sales revenue, explains how sales revenue is calculated, and analyzes how sales revenue can affect the money a business has available.
What is Sales Revenue?
Regardless of what industry or type of business a company operates, it must earn money to be profitable. Sales revenue is the amount of money that is brought into the business from the sales of products and/or services over a period of time.
If sales revenue goes down, it can affect all aspects of the company. If the amount of money coming into the business decreases, other cuts must be made in payroll, expenses, and resources. Likewise, when sales revenue increases, more money is coming into the business, and extra cash flow may be available for debt reduction, expansion, and perks for the employees.
One of the greatest challenges of business owners is to understand the importance of sales in their company. Especially in the case of a sole proprietor, the owner may think their role is to provide a service. However, their main role is to generate sales revenue. That is accomplished through the service they provide or the products they sell.
Calculating Sales Revenue
The sales revenue calculation is very simple. It is the number of a product sold multiplied by the sales amount of that item:
Sales Revenue = Units Sold x Sales Price
Let's say you are selling sets of pots and pans. Your pots and pans are special, they have many features that competitors don't offer and have more pieces than typically found in pots and pans sets. Because you have exceptional products, you are able to charge a premium price for your sets. Last year you sold 500 sets of pots and pans for $350 each.
In this example, your sales revenue is found by the following formula:
Sales Revenue = 500 x $350
Sales Revenue = $175,000
If your sales drop this year to only 400 units, there will be a negative effect on your sales revenue:
Sales Revenue = 400 x $350
Sales Revenue = $140,000
By selling 100 units less in a year, your sales revenue drops by $35,000 this year.
However, if your sales increase this year to 600 units, there will be a positive effect on your sales revenue:
Sales Revenue = 600 x $350
Sales Revenue = $210,000
By selling 100 units more in a year, your sales revenue increases by $35,000. That's $35,000 more money available for business needs and may allow you to give yourself a pay raise!
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Sales revenue is the lifeblood of a business. If sales are low, the company suffers. Increasing sales revenue does not guarantee that a company is financially healthy, but it definitely helps a company to have more options and opportunities. For a manager or business owner, sales revenue is one of the most critical numbers to look at when evaluating the financial status of a business. If this number is not on target, there will be many financial challenges within the company.
Let's review. Sales revenue is one of the key indicators of the well-being of a company. The sales revenue number indicates the number of sales or income generated by a business and is one of the major factors of how much cash a business has available. Sales revenue is generated by multiplying the number of a product sold by the sales amount using the formula: Sales Revenue = Units Sold x Sales Price. The more sales a company makes, the more money available within the business.
Points to Remember
Sales revenue: the amount of money that is brought into the business from the sales of products/services over a period of time
Sales revenue = units sold x sales price: formula generated by multiplying the number of a product sold by the sales amounts
Following this lesson to its conclusion can prepare you to realize these objectives:
Paraphrase the definition of sales revenue
Calculate sales revenue using a given formula
Specify the importance of sales revenue to a business
Consider a firm that sells pens and pencils. Each pen is sold for $0.25 and each pencil is sold for $0.50. If the firm sells 100 pencils and 300 pens, what is the total sales revenue that they are collecting?
In year 1, the firm sold 300 units of its product at $5 per unit. In year 2, the price decreased to $4 per unit, but the firm increased the number of units sold to 400 units.
What was the firm's total revenue in year 1?
What was the firm's total revenue in year 2?
What was the percentage change in the firm's total revenue from year 1 to year 2?
Funky Frisbee Co sold 500 Frisbees in the previous month for $30 each. However, 50 were returned because they didn't fly right. What was Funky Frisbees net sales revenue?
Quick Car Co sells the following vehicles, here are the types and list prices:
SUV : $32,000
Quick sold 55 compacts, 76 mid-size, 110 SUV and 105 trucks last month. What is their total sales revenue?
A new advertising campaign for trucks starts the following month, If truck sales increase by 20 vehicles, what will the new sales revenue be?
Solution to Question 1: The total revenue can be calculated by multiplying the prices of pens and pencils by their respective quantities and summing these two values together.
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