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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.
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!
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.
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Financial Accounting: Help and Review18 chapters | 236 lessons
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