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How to Calculate Sales Revenue: Definition & Formula Video

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  • 0:04 What is Sales Revenue
  • 0:59 Calculating Sales Revenue
  • 2:36 Understanding Relevance
  • 3:05 Lesson Summary
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Lesson Transcript
Instructor: Tara Schofield
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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