January 26, 2022

SB-Accounting

Accounting + Finance Blog

Revenue meaning and explanations

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Revenue is an integral part of every business. Large companies knows the importance of revenue and are doing all it could to maintain a high revenue profile. The importance of revenue to small businesses can never be overemphasis. In fact, revenues are boosters to entrepreneurs. Before I start all the gist I have for you on the business accounting term: revenue, let me begin with the definition of revenue.

Meaning of Revenue, may different from Income

Revenue is simply define as money earn from the day-to-day business activities of a business organisation.

Another definition of revenue is the collection of cash and other valuables for performing tasks that are the ordinary business activities of a firm.

The money earn or collection of cash and other valuables are what makes up the revenue of a business. The money earn is the end result for the efforts made by the entrepreneur and his staffs. Business activities are what the business sales or the services rendered to bring in the revenue.

Examine the example of a firm that sells bag of rice. It means that the cash collected from the sales of ten bag of rice constitute a revenue.  The money collected by Electrical firm for electrification of a Mason is regarded as revenue.

Revenue is Income, but not all incomes are Revenues. This is the ground truth. There are two types of Income: Revenue and gains. Here my focus is on “revenue.” Furthermore, revenue earned may be paid for immediately, “cash” or payment may be deferred to a latter date, “credit.”

Entrepreneurs and Revenue

It is true that profit is a major motivator for entrepreneurs to continue a business. Yes, a business that falls to earn profit are usually placed out of bar. But not all entreprenuer sells their business when it is striked by losses.

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Femi Otedola, former chairman and founder of Forte Plc is a good example on this. In June 2019, he sold his fortune to pursue his Zest on the energy sector. Interestingly at the time of sales the Net Worth of the Forte was N125 billion. But he sold it for N250 billion. This is 2X of the original worth and a 100 percent capital gains.

 

Revenue is a good measurement of a company growth. When businessman sees this growth, it amplifies them.

Usefulness of Revenue

Revenue is used for various purposes.

1. It is a yardstick to measure business growth.

Growth is an important aspect of a business. A business that fails to grow is similar to a baby that fails to start working on his own. Growth in revenue can serve this purpose.

Revenue as a measure of growth is very useful for startup companies most importantly, firms that are leveraging technology to build convenience for people. These startups must time are not profitable in their first five years of business. Therefore, relies in revenue to measure growth.

Jumia, the biggest ecommerce company in Africa is a good example. In it first five years, the firm makes no profit at all. However, one way to know if it is growing and at what scale, is revenue. The firm continues to experience growth in revenue. It expanded to more countries in Africa than you may have imagine.

2. Revenue is used to measure a business market share.

If you really want to know the market share of your business. One way to do so is revenue. All you need to do is find out the total market share of the sector your business belongs. Then, use this simple formulae.

 

Market Share = Revenue for the year ÷ Total market share × 100

 

This will give you the market share of your business in percentage.

To illustrate. Assuming your business is in the educational sector. Let’s say that the total market share of education is N200 billion in 2018. Now let say, the total revenue your enterprise earned was N100 million. Then, your firm’s market share = 100,000,000 ÷ 200,000,000,000 × 100. This gives 0.05 percent market share.

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3. Revenue is required in preparing financial statements.

At the end of every year, it is mandatory for every business owner either big or small to prepare and present a financial statement. Revenue is one of the requirements in a business financial report. Take an example of Guinness Nigeria Plc, annual financial report of 2018.

Above is a snapshot. You can see with no doubt in your mind that revenue is the first item stated in the income statement (An income statement is a part of financial statement).

4. Revenue is used for Financial Analysis.

Revenue is basically used in analysing financial statement. After, the entrepreneur had prepared its financial statement. To grasps more meaning from the statements, he or she can carryout financial statement analysis. One way revenue is used in this stead is the gross profit margin. The formula for it is Gross Profits ÷ Revenue × 100.

If the gross profit for the year of the educational firm mentioned earlier was N15 million with a total revenue of N100 million. Its gross profit margin = N15,000,000 ÷ N100,000,000 × 100 = 15 percent. This implies that in every N100 revenue earned, the firm makes a profit of N15.

5. Revenue serves as a guide to investors and creditors.

Stakeholders interested in investing in businesses always request for a financial statements. The first item that may caught their interest is the revenue earned for the year. A robust revenue may encourage the investors to take action. Although, this is not the only financial information they need.
Also, creditors will believe the firm will sale the goods sold to it on credit and repay almost immediately thereby maintaining liquidity. As a result, continues the credit offered to such firm with growth in revenue.

Revenue takes different forms

Though, in this article the word revenue has been used. Other terms are used as revenue and this depends on the business in question. Here are a few of such.

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Trading firm. This type of business calls revenue, “sales.” Though most times it they retain the term revenue. At times it refers net sales as turnover.

Manufacturing firms. This used similar term as in trading business.

Financial Institutions.

Financial institutions uses the term interest income as the term for revenue. The example of Access bank 2018 financial statement is a living proof.
 

Government.

This has various forms of revenue machine. Tax revenue is one of such and remains the primary source of revenue to government in all countries. In Nigeria, another important source of revenue stream known overtime is Revenue from oil and gas sector of the economy.

To conclude, revenue is a vital elements of every business. If this is not the case, why do businesses employ marketers to boast revenue? Giving them big names such as business developers and the likes?

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