It’s important for your accounts receivable team to track both gross revenue and net revenue. But what is the difference?
It’s crucial to understand the distinction because gross revenue provides only part of your company’s financial picture. You can’t budget solely based on your business’s gross sales. Net income provides a much more comprehensive view, but it’s hard to interpret without gross revenue for context.
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What is the difference between gross revenue and net revenue?
The difference between your gross revenue and your net revenue is equal to your company’s expenses. These include the direct cost of goods sold (COGS) — the costs that can be allocated directly to particular units or product lines — as well as other variable expenses and fixed costs (overhead). In other words, this is the formula:
Gross revenue – Expenses = Net revenue
Here are some of the expenses that account for the difference between gross revenue and net revenue.
- COGS: These are the direct costs your company incurs to manufacture goods or purchase inventory.
- Marketing costs: Your marketing budget should include the costs of advertising, market analysis, web development and other brand-building or marketing efforts.
- Office supplies: These are the materials you use in the office, ranging from paper clips to toilet paper.
- Rent and utilities: These are payments for facilities, electricity, water and related services.
- Employee compensation: This includes salaries, wages, commissions and employee retirement benefits. [See our picks for the best employee retirement plans.]
- Taxes: Payroll taxes, excise taxes, sales tax and income tax are all deducted before you arrive at your net income.
- Legal and administrative costs: Any fees paid to lawyers, accountants and other consultants come out of your gross revenue.
- Technology: This includes costs for software and other subscriptions or licenses.
Beyond the COGS, the other costs outlined above fall under overhead and other variable expenses, as you’ll see in the net revenue formula below.
While interest payments are another item you should deduct from your gross revenue to calculate your net revenue, dividend payments usually are not. Those payments are deducted later in your business accounting tasks, after you’ve calculated net revenue.
Key Takeaway
Net revenue indicates how much money your company brought in after you account for all business expenses in the same period.
Gross revenue reporting
You’ll report your business’s gross revenue on your income or cash flow statement as top-line revenue. It’s equal to your gross sales — the total amount your company took in over a certain period.
Gross revenue doesn’t really have a formula, but this is what it would look like:
Total sales over covered period = Gross revenue
Gross revenue is a relatively easy number to calculate and report using top small business accounting software (see our recommendations below). It’s just the total money that came into your business during the reporting period in the form of sales, but not capital contributions or loans.
Note that this figure does not take into account any costs you incurred to produce the sales that generated that revenue. [Read related article: How to Calculate Annual Revenue]
Net revenue reporting
While it’s still relatively straightforward, net revenue is slightly more challenging to report because it involves a few more calculations. In accounting, your company’s net revenue is your bottom line. It’s equal to your gross revenue for the reporting period minus all expenses you incurred over the same period.
Here’s the formula for net revenue:
Gross revenue – Cost of goods sold – Overhead – Other variable expenses = Net revenue
You’ll use this formula to calculate how much of your business’s gross income is left over after you account for all of the company’s expenses. It reflects your organization’s total profit over a particular period.
Gross vs. net revenue examples
Consider a retail clothing store that has $250,000 in sales over a particular quarter. That $250,000 is the company’s gross revenue for the quarter.
Beginning with that gross revenue, the store’s accounting team then subtracts the cost of goods sold — the amount the store paid to acquire inventory — and the overhead and variable expenses. These include the rent for the storefront; utility costs; compensation paid to store employees; expenses for office supplies; payroll, income, sales and excise taxes; interest expenses for money borrowed to buy inventory; and all other applicable costs.
The amount remaining after all of those items are deducted from the $250,000 gross revenue is the store’s net revenue for the quarter.
[Related: Guide to Financial Management Health for Startup Businesses]
When to use gross vs. net revenue
Gross revenue is extremely useful for tracking your sales volume. It ensures that your company’s market share is growing and verifies that your salespeople are hitting their goals. However, it provides little insight into your company’s overall profitability.
Net revenue, on the other hand, is great for tracking your profitability and provides considerably more insight than simple gross revenue does. But net income also has its limits. For example, as net income fluctuates, you can’t immediately tell why. Without looking at your gross revenue over the same period, you can’t determine whether your business’s net income is changing because of fluctuations in sales or expenses.
Tip
You need to know both your gross revenue and your net revenue in order to expand strategically and ensure sufficient cash flow to support operations.
Gross vs. net revenue ratios
Both gross revenue and net revenue are regularly used in accounting ratios and other metrics to indicate a company’s financial strength and performance.
Gross profit ratio is one metric that provides key insight into the profitability of your specific products or services. Also called gross profit margin, gross profit ratio is the percentage of gross sales of a particular product or service that is profit above the cost of producing that good. The calculation is represented by this formula:
Gross profit ÷ Net sales = Gross profit ratio
In this formula, net sales equal your gross sales minus returns minus the COGS.
Gross sales – Returns – COGS = Net sales
Net profit margin, also called return on revenue, is another metric based on your company’s revenue — this time, your net revenue. It uses this formula:
(Revenue – Cost) ÷ Revenue = Net profit margin
In other words, your net profit margin is your business’s overall profitability, accounting for all fixed expenses and overhead.
Did You Know?
Your gross profit ratio can measure the profitability of specific product lines, answering the question of whether certain products are profitable to make and sell.
Best accounting software for tracking gross and net revenue
Tracking gross and net revenue doesn’t have to be a large lift. The best accounting software is equipped with robust revenue tools to help your accounting team stay on top of everything. Here are a few of our recommendations for accounting software platforms that can take your revenue tracking and financial management to the next level.
- Oracle NetSuite: This accounting software includes advanced revenue management features and additional compliance functions, so there are no financial surprises later. Read more in our Oracle NetSuite review.
- Xero: Xero has special report features that allow you to review how much revenue you receive from each customer to help you figure out who your most loyal customers are. Learn more in our Xero review.
- Zoho Books: Zoho offers free accounting software that allows small businesses with revenues of $50,000 or less to track multiple bank accounts and credit cards. Find out more in our Zoho Books review.
- QuickBooks Online: Intuit’s QuickBooks software has great tools for recording and categorizing expenses, which you can then analyze through the program’s reporting functionality. Get all of the details in our QuickBooks Online review.
- FreshBooks: FreshBooks’ two highest tiers, the Premium and Select plans, include a feature that allows you to track project profitability so you can see which services contribute most to your net revenue. See the plan breakdowns in our FreshBooks review.
Gross vs. net revenue: Two halves of the whole picture
Both gross and net revenue are key to getting a full view of your organization’s financial health. From identifying where your business is growing to determining how profitable your company and specific products are, gross and net revenue paint the entire financial picture of your business. When it comes to important financial metrics, tracking gross and net revenue is nonnegotiable. Fortunately, high-quality accounting software makes the calculations a breeze.
Natalie Hamingson contributed to this article.
