Revenue – an introduction
In today's competitive business landscape, fast-growth companies face many challenges. One of the most critical aspects of achieving and sustaining rapid growth is the ability to generate and track revenue effectively. In this article, we’ll explore revenue as a key metric for fast-growth businesses, delving into its importance, interpretation and calculation methods. We’ll also emphasise the significance of segmentation, such as location or channel segmentation, to better understand and optimise revenue.
What is revenue?
Revenue, also known as sales or turnover, refers to the total amount of money generated by a business through the sale of its products, or services within a specific period. It’s the lifeblood of any organisation, serving as an indicator of its market performance, profitability, and overall financial health. For fast-growth businesses, revenue growth is particularly important, as it signals a company's ability to scale, attract investment, and outperform its competitors. Using the metrics MRR and ARR can be helpful in tracking your revenue as well.
How to understand revenue
Revenue segmentation is a powerful way to understanding the make-up of revenue. Some examples of how to segment are as follows:
- Product or service Line (product A, B or C)
- Customer demographics (age, gender, income, or occupation)
- Channel (online, retail stores, direct sales or wholesale)
- Location (or geographic Region)
- Market segment (B2B, B2C, B2B2C)
- Tiers: (subscription levels, pricing tiers)
It’s important for a business to understand what segmentation is useful to them and where this segmentation will be tracked, whether in the finance application or revenue system or another analytics reporting tool.
To use location as an example, segmentation could be achieved by assigning unique identifiers to each location where products or services are sold and for each transaction allocating to this identifier.
Once segmented, businesses can analyse revenue data to uncover trends, opportunities and areas for improvement.
Why is revenue important?
Revenue is vital for fast-growth businesses for several reasons:
- Cash flow: Strong revenue generation helps a business have the necessary cash flow to cover its operating expenses and invest in growth initiatives.
- Attracting investment: Investors are more likely to fund companies with solid revenue growth, as it signifies potential for future profitability.
- Market share: Increasing revenue often correlates with an expanding market share, as it demonstrates the company's ability to attract and retain customers.
- Business performance: Tracking revenue helps businesses gauge their performance and make informed decisions on product development, marketing, and expansion.
What does revenue look like?
How do you calculate revenue?
Calculating revenue is relatively simple. For a given period, multiply the number of products or services sold by their respective prices. The resulting figure represents the total revenue generated.
Revenue = Quantity sold x Selling price
Where the selling price excludes taxes, discounts, returns or refunds.
Revenue worked example:
If you 100 customers on a £150 plan, the total revenue would be calculated as follows:
Revenue = 100 x £150 = £15,000
This is a very simple example. Multiple service plans or products will typically make up revenue. Equally, there will be a number of deductions or provisions against revenue, which are covered in more detail below.
What do you exclude from revenue?
While revenue appears to be relatively simple there are a few nuances to get it accurate. It can very quickly become complicated, especially when dealing globally.
- Taxes: Whether this is VAT or Sales Tax, revenue is recorded exclusive of taxes. Taxes are considered a liability to the government rather than income for the business.
- Discounts: These may be trade, volume or promotional offers, impact revenue figures. Revenue is reported net of these discounts, meaning the discounts are deducted from the gross revenue. Discounts represent a reduction in the price of products or services and are not considered part of the income generated, it is however useful to present these separately in any reporting so you can easily monitor and track these.
- Returns: If a business accepts returns of sold products, these amounts need to be accounted for in the revenue figure (i.e. deducted from revenue). If you have a returns window, for example, up to 30 days from purchase, a provision may be required for returns relating to the period being finalised – you can use an estimate based on recent history to accurately forecast the percent of sales that will be returned.
- Shipping fees: If shipping fees to customers are charged separately from the product or service price, they would be recognised as additional revenue, as they represent income generated from delivering the products or services to customers. Typically, you would present this separately to the revenue from the good or service, so you can monitor the shipping income relative to shipping costs.
What is deferred revenue?
- Deferred revenue, also known as unearned revenue or revenue in advance, is a concept that arises when a business receives payment from customers for goods or services that will be delivered or fulfilled at a later date. In simple terms, it refers to the recognition of revenue that has been received but has not yet been earned.
- In the context of an e-commerce business, deferred revenue typically occurs when customers click and pay for products that haven’t yet been shipped. For example, if the product is not in stock, or there’s a delay in shipping for some reason.
For SaaS businesses, deferred revenue arises from subscription-based models. When customers subscribe to a software service and pay in advance for a specified period, such as annually, the payment received is considered deferred revenue (for the future months). The revenue is recognised gradually over the subscription period as the service is provided, with the unearned portion being treated as deferred revenue until it’s recognised as earned revenue over time.
Conclusion
Revenue is a crucial metric for fast-growth businesses, serving as a barometer of their financial health, market performance and scalability. By tracking revenue and leveraging it to inform decision-making, fast-growth businesses can optimise their operations, drive profitability and position themselves for long-term success. Segmenting revenue can give deeper and more valuable insights into business performance across different areas to drive growth. In today's competitive business environment, understanding and optimising revenue generation is essential to achieving and sustaining rapid growth.
