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What is annual revenue? There are many ways one can identify the financial health of an organization. Prime amongst the financial metrics often evaluated to understand the performance of the firm is the concept called annual revenue. So, let’s learn what annual revenue meaning is.
Annual Revenue Meaning
Talking about Annual revenue meaning, it is the income generated by an organization before any expense deductions are done in a financial year. Annual revenue is the total amount of money that an organization made from the sale of its products or service in a financial year.
There are two types of revenue that are generated by the business. One is called the operating revenue. This is the revenue made by the organization from the sale of its products or services.
The second one is called the non-operating revenue. This would mean the income that is generated from selling organizational assets, income which is generated from dividends of shares purchased by the organization, revenue from interests accrued as part of a loan given or even from the transactions carried out in the stock market, and even revenue from renting out a property. In other words, non-operating revenue is income from secondary sources. The non-operating revenue that organizations earn is often time one-time gains with chances of recurring very feeble.
Thus, along with the sales, annual revenue would also include the returns from the other investments of the organization including the intellectual property it holds.
What is annual revenue for an organization is an important metric as the top management would love to keep an eye on the business revenue, profit, and losses being made in the business. Thus, calculating annual revenue will help in understanding the revenue as opposed to the costs being incurred by the organization.
What Are The Benefits Of Knowing Annual Revenue?
Apart from understanding how well the products and services of an organization are being liked by the customers on the basis of sales, knowing what is annual revenue has some key advantages.
Organizations utilize the money it has to pay salaries to their employees, pay utility bills, and also for renewing insurance. This can amount to tremendous pressure on the organization.
As it is the annual revenue, meaning the income created by an organization that is being used to make payments. If the organization doesn’t have sufficient funds as part of its annual revenue, then it is forced to borrow more funds from external agencies to continue running its operations.
Income Vs Revenue
In understanding what is annual revenue it is equally important to know the difference between income and revenue. Income vs revenues is often misconstrued by people. While in common parlance income and revenue are used interchangeably, revenue is called the top line while income is called the bottom line.
Comparing income vs revenue, it’s important to differentiate the two. While revenue is the gross income that is any income the organization makes before the expenses are deducted. Income is the net earnings of the organization after all the deductions. It is the measurement that highlights the profitability of the company.
One can achieve top-line growth by the introduction of a new product while one can achieve bottom-line growth by reducing one’s expenses. Revenue is usually higher than income, however, income is more important for an organization as it ensures that the organization is financially stable and healthy.
How To Calculate Annual Revenue?
Annual Revenue can be calculated as follows:
Annual Revenue = Number of Units of Products sold × Sales Price
All one needs would be the knowledge of how many units of products or service was sold and at what price. If the company had multiple products to offer to the customer, then calculating the annual revenue for each product using the above formula and then adding all the value thus derived for all products, will provide the total annual revenue.
The best way to understand this is using an example:
Annual Revenue Calculation
Let’s assume that a business sells pens, pencils, and erasers. The pens are sold at a sales price of $5, pencils for $2, and erasers for $1. If the business sells 500 pens, 1000 pencils, and 500 erasers then, the annual revenue can be calculated as follows:
Annual revenue for pen= Number of Units of pens sold × Sales Price of pen
= 500 × 5
Annual revenue for pencil= Number of Units of pencils sold × Sales Price of pencil
= 1000 × 2
Annual revenue for eraser= Number of Units of erasers sold × Sales Price of erasers
= 500 × 1
Now to calculate the total annual revenue one needs to add the annual revenue for pen, pencil, and eraser as follows:
Total Annual Revenue = $2500 + $2000 + $500
The total annual business revenue for the year is $5,000.
Knowing what annual revenue is and having better control over the annual revenue is of paramount importance. Having business revenue systems in place works perfectly towards this end.
Business revenue systems help organizations better strategize their sales tactics. The organization is able to better manage the sourcing of raw materials for its products, offer products and services to its customers at far competitive rates, and manage the operations and operations cost-effectively and efficiently while maintaining optimum inventory levels.
What Is Annual Revenue – End Note
In conclusion, one can look at annual revenue and appreciate this essential financial calculation. For the employees and the top management annual revenue is the perfect source to understand where the organization stands. Business revenue systems can be created thereby being able to better map the gap that exists between gross annual revenue and the net business income.
What is annual revenue is therefore a question all organizational heads should ask and have an eye on for the all-round development of the organization.