Gross revenue definition
/What is Gross Revenue?
Gross revenue is the total amount of sales recognized for a reporting period, prior to any deductions. This figure indicates the ability of a business to sell goods and services, but not its ability to generate a profit. Deductions from gross revenue include sales discounts and sales returns. When these deductions are netted against gross revenue, the aggregate amount is referred to as net revenue or net sales. A sample presentation of this format, which appears at the top of the income statement, is in the following exhibit.
How to Evaluate Gross Revenue
The investment community sometimes calculates the value of a business as a multiple of its gross revenue, especially in new industries or for startup companies where there are few other measures to use as the basis for a valuation. Under these circumstances, company management may unduly focus on increasing gross revenue at a rapid rate in order to increase the company valuation for funding purposes or to obtain a higher price in the event of a sale of the business. An excessive focus on gross revenue can have a number of negative consequences, such as:
Issuing new products that have not yet been entirely tested, so that sales returns are excessively high and the company's long-term reputation is damaged.
Selling even when there is little or no discernible profit, simply in order to increase the revenue figure.
Engaging in spurious bill and hold transactions in order to recognize revenue on items that have not yet shipped from the premises of the seller.
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Consequently, it is better for an investor to focus on other metrics than the amount of gross revenue, such as net sales, gross margin, contribution margin, or net profits.
The use of gross revenue as a metric has somewhat more validity in a services organization, since there are no sales returns that might otherwise create a substantial difference between gross sales and net sales.
The Difference Between Gross Revenue and Net Revenue
The essential difference between gross and net revenue is sales discounts and sales returns. These deductions are applied to gross revenue in order to arrive at net revenue. When a business has few sales discounts or returns, then gross and net revenues are nearly the same. For analysis purposes, net revenue is the better figure to use, since it reveals how much cash is actually being received from customers in exchange for goods or services.
Terms Similar to Gross Revenue
Gross revenue is also known as gross sales.