What is revenue? Definition, calculation and examples

Published Friday 19 December 2025

Table of contents

• What is revenue?
• Why revenue matters for your small business
• How to calculate revenue
• Revenue vs profit: Key differences
• Revenue vs income: Key differences
• Types of business revenue
• What is revenue recognition?
• Best practices for effective revenue tracking
• Unlock your business potential with Xero
• FAQs on revenue

Key takeaways

• Apply the basic revenue formula (Units sold × Price per unit) and adjust it for your specific business model, whether you're service-based, subscription-based, or ecommerce, to accurately measure your total income before expenses.
• Track both revenue and profit separately since high revenue doesn't guarantee profitability; revenue shows total sales while profit reveals what remains after all expenses are deducted.
• Implement consistent revenue tracking using accounting software or POS systems rather than spreadsheets to reduce errors, automate processes, and maintain accurate financial records for better decision-making.
• Recognize revenue according to proper accounting principles by recording it when earned (not when payment is received) under accrual accounting, following the five-step revenue recognition process outlined in current accounting standards.

What is revenue?

Revenue is the total money your business earns from selling products or services before deducting any expenses. A bakery generates revenue by selling bread and pastries. A freelancer creates revenue by providing consulting services. Revenue is also called sales or turnover and serves as the foundation for calculating profit.

Why revenue matters for your small business

Revenue tracking shows you exactly how much money flows into your business before expenses. This data helps you make smarter decisions and plan for growth.

Revenue tracking provides three key benefits:

• Performance measurement: Monitor progress toward financial goals
• Trend identification: Spot patterns in sales and seasonal changes
• Strategic planning: Make informed decisions about pricing, inventory, and expansion

Business growth

Revenue growth provides resources for reinvestment and expansion to grow your business.

Consistent revenue allows you to:

• Open additional locations
• Upgrade equipment and technology
• Develop new products or services
• Attract investors for larger opportunities

For example, a bakery earning steady revenue can reinvest profits to open a second location or upgrade to commercial-grade ovens.

Measure performance

Tracking revenue allows you to monitor progress toward financial goals. Ask yourself:

• Are you meeting your revenue targets?
• Where can you improve?
• Which areas contributed most?

Benchmarking against the market can also provide valuable insights. Explore Xero Small Business Insights (XSBI) to learn more.

Gain insights and identify trends

Revenue data helps businesses make smarter inventory, marketing, and product development decisions by identifying key patterns:

• Are sales increasing or decreasing?
• Which products are performing best?
• Are seasonal factors affecting your revenue?

Make informed business decisions

Data-driven decisions lead to better business outcomes. Revenue tracking helps you determine:

• Should you adjust your pricing strategy?
• Is it time to invest in new equipment?
• Are you ready to expand into new markets?

Revenue doesn’t equal profitability. Learn more about increasing revenue.

How to calculate revenue

Calculating revenue helps you measure business performance and make informed financial decisions. Follow these steps to determine your revenue accurately:

1. Use the basic revenue formula

Revenue = Units sold × Price per unit

This simple formula works for most businesses selling products.

Example: A bakery sells 100 loaves at $5 each = $500 revenue

2. Adjust for different business models

Depending on your business type, the method for calculating revenue may differ. Here's how to adjust your calculation:

• Service-based businesses: Revenue = Hourly rate × Number of hours worked (For consultants or freelancers)
• Subscription-based businesses: Revenue = Number of subscribers × Subscription price (For gyms, streaming services, etc).
• Ecommerce businesses: Each transaction may have a different price, so track every sale individually.

3. Calculate net revenue

Net revenue provides a more accurate picture of your earnings after returns, discounts, and allowances. The formula is:

Net revenue = (Units sold × Price per unit) - Discounts - Returns

This gives a clearer understanding of your actual income, as it accounts for any adjustments to your revenue.

4. Track your revenue

To maintain accurate financial records and make better decisions, it's essential to track your revenue consistently. Follow these steps to track your revenue effectively:

1. Choose a method:

• Spreadsheets (best for very small businesses, but prone to errors and time-consuming)
• Point of sale (POS) systems (great for physical stores and automatically integrate sales data)
• Accounting software such as Xero (best for automation and advanced financial reporting)

2. Record Transactions:

• Ensure every sale is recorded correctly and consistently.
• Use tools to automate as much of the process as possible, reducing errors and saving time.

Revenue vs profit: Key differences

Revenue measures total money coming into your business, while profit shows money remaining after all expenses are deducted.

Understanding this difference is crucial for business success. High revenue doesn't guarantee profitability if expenses exceed income.

There are several key differences between revenue and profit.

Revenue

Revenue looks at your total sales before you deduct any costs:

• Calculation: Revenue = total sales
• Focus: Shows income generated
• Income statement: Sits at the top, so it’s sometimes called the “top line”
• Significance: Demonstrates sales performance and market demand

Profit

Profit shows what’s left after you pay all your costs:

• Calculation: Profit = revenue – costs
• Focus: Highlights income after you deduct all costs
• Income statement: Appears at the bottom, so you often hear it called the “bottom line”
• Significance: Shows your business’s financial health and sustainability

Why it matters

Understanding the difference between revenue and profit is essential for making smart business decisions. While high revenue might look impressive, it doesn't guarantee success; if your expenses are too high, you could still operate at a loss.

Knowing both metrics helps you:

• Set realistic goals: Base targets on actual profit, not just sales figures.
• Make informed pricing decisions: Ensure your prices cover costs and generate profit.
• Drive long-term success: Focus on sustainable growth, not just boosting revenue.

Revenue vs income: Key differences

Although often used interchangeably, there are several subtle yet significant differences between revenue and income.

Income is a broader term that includes revenue along with other earnings, such as government subsidies or one-time financial gains.

Revenue

Revenue focuses only on your core sales activity:

• Scope: Limited to income from primary business activities, like sales of goods or services
• Focus: Shows core business performance, helping you assess demand and pricing
• Performance: Reflects sales performance and market demand, low revenue may signal a need for strategic changes

Income

Income looks at all the money your business earns, not just sales:

• Scope: Includes revenue plus other earnings, such as investments and subsidies
• Focus: Provides a broader view of financial health beyond daily sales
• Performance: Shows total financial health, high income indicates efficient resource management and extra earnings from various sources

Why it matters

Understanding the difference between revenue and income is key to making informed decisions about your business's finances. While high revenue can indicate strong sales, it's the income that ultimately reflects your overall financial stability. Recognizing both metrics ensures you have a clearer picture of your business's performance. Here's how understanding both helps:

• Make better financial decisions: Know where your money is coming from and how to optimize your earnings.
• Assess business health: Revenue might be high, but income reveals whether you're truly profitable after all costs.
• Plan for growth: By balancing both revenue and income, you can ensure you're on track for sustainable growth, not just short-term gains.

Types of business revenue

Businesses generate revenue through different channels, which fall into two main categories: operating revenue and non-operating revenue.

Operating revenue

Operating revenue is income generated from your primary business activities and forms the foundation of financial performance.

Three main types of operating revenue:

• Sales revenue: Income from selling products, like a bakery selling bread and pastries
• Service revenue: Earnings from providing services, such as consulting or repairs
• Subscription revenue: Recurring income from memberships, like gym fees or streaming services

Helpful tip: Sales revenue is often used as a catch-all term for main income-generating activities, whether selling goods or providing services. Service revenue is used when a business wants to specifically track income from services, particularly if it offers both goods and services.

Non-operating revenue

Non-operating revenue is income generated from activities outside your core operations. These earnings are often irregular and not directly tied to your business's ongoing performance.

They include earnings such as:

• Interest income: Earnings from interest on investments, like depositing retained earnings in a bank
• Dividend income: Income from shares in other companies, e.g., investing in tracker funds that pay dividends.
• Rental income: Leasing out property or equipment, such as renting extra space in a bakery.
• Gain on sale of assets: Income from selling assets like old equipment, like when a bakery sells its old ovens after upgrading.
• Licensing fees: Income from allowing others to use intellectual property, like patents or trademarks.
• Franchise fees: Earnings from franchisees operating under your brand, e.g., expanding a bakery through franchising.
• Advertising revenue: Income from displaying ads on your website or property.

What is revenue recognition?

Revenue recognition determines when you record revenue in your accounting system. Under accrual accounting, you record revenue when earned, not when payment arrives. To do this correctly, a company should apply the following five steps, which include identifying the contract, determining the transaction price, and recognizing revenue when a performance obligation is satisfied.

This timing ensures your financial statements accurately reflect business performance for each period.

You should recognize revenue according to the Generally Accepted Accounting Principles (GAAP) rules; the latest standard became effective for nonpublic companies for reporting periods starting after December 15, 2018.

Some small businesses, like sole proprietors, may use cash accounting, where you record revenue when payment is received, not when it’s earned.

Here's more about cash vs accrual accounting.

Best practices for effective revenue tracking

Accurate revenue tracking prevents costly mistakes and ensures reliable financial data for decision-making.

Poor tracking leads to:

• Decision-making errors: Wrong data creates wrong choices
• Cash flow problems: Inability to predict money shortages
• Tax compliance issues: Incorrect reporting triggers penalties. For example, the IRS requires businesses to file Form 1099-NEC by January 31 to report payments made to non-employees in the previous tax year.

Maintain accurate records

• Daily: Update your records to stay on top of transactions.
• Monthly: Reconcile revenue with bank statements to spot discrepancies early.
• Always: Keep receipts and other supporting documents for tax and auditing purposes.

Categorize your revenue

Break down revenue by product lines, sales channels (online, in-store), and customer segments. This helps you understand where your revenue is coming from and enables more effective decision-making.

Use tools for automation

Invest in accounting software to streamline tracking and reduce human error. This saves time and ensures more accurate financial insights.

Review data regularly

Set aside time each month to review your revenue data, spot trends, and identify areas for improvement.

Unlock your business potential with Xero

Knowing about revenue and tracking it is key to understanding where your money's coming from, your business's future, and the decisions you need to make to succeed.

Xero simplifies revenue management with automated monitoring, real-time insights, and streamlined accounting all in one platform. Get one month free.

FAQs on revenue

Here are answers to common questions about revenue and its impact on your business.

Can a business have high revenue but still be unprofitable?

Yes. Revenue only measures the total money earned from sales. If a business's expenses (like rent, salaries, and marketing) are higher than its revenue, it will operate at a loss. That's why tracking both revenue and profit is essential.

Does revenue include sales tax?

No, revenue should not include sales tax collected from customers. Sales tax is money you collect on behalf of the government and must be paid to the tax authorities. Your revenue is only the amount you earn from the sale itself.

What's the difference between revenue and cash flow?

Revenue is the money your business earns from sales, which can be recorded before you actually receive the cash (using accrual accounting). Cash flow is the actual movement of money into and out of your business. A sale can increase your revenue immediately, but your cash flow only improves once the customer pays the invoice.