Revenue is revenue, right?

By Outlier via   Article

Gross, Net and other Adjectives

“Revenue is revenue, right? I’m not sure, that entirely depends what you mean. There are a number of flavors of revenue, and today we’ll discuss the two most common: Gross Revenue and Net Revenue.

Gross Revenue is the total amount of cash coming into your business from operations. For example, if you sell basketballs for $20 apiece and you sell 1,000 balls your gross revenue is $20,000. This is also known as “top line” revenue as it appears as the top line on financial statements. (I know, clever!)

Net Revenue is the total amount of cash coming in minus your cost of goods (COGS). Back to our example, if you sell 1,000 basketballs at $20 apiece but they cost you $10 to make (your COGS) then your net revenue is $10,000.

Okay, so when should I use which?
Gross revenue will always be useful on your financial statements as it’s the basis for many other calculations. However, you should never use it as a metric since it’s very misleading! As you can imagine, by ignoring the COGS you are missing the fundamentals of the business. A business that sells a product for $1 that costs $10 to make would have fantastic Gross Revenues but be a truly horrible business!

Net Revenue is a much better reflection of your business for the purposes of determining things like LTV (customer life time value) and ARPU (average revenue per user). For example, since it takes the COGS into account you can compare it to your CAC (customer acquisition cost) to determine if you are generating more money from customers than it costs to acquire them.

Net Revenue is not the same as profit! Your profit has to take all costs into account, not just COGS. Many companies confuse the two to their own peril!

*** END WARNING ***”

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