Businesses, investors, and financial analysts use different metrics to measure a company’s financial health. Net revenue is one of the most important metrics, as it shows whether a business is generating a profit. But what is net revenue?
Net revenue is a company’s total sales minus any returns, allowances, and discounts. The figure represents the amount of money a company brings in from its sales before expenses are taken out. A high net revenue indicates success in generating sales, while a low net revenue may signal struggles.
This post will describe how to calculate net revenue and its importance. I’ll also provide tips for improving your business’s net revenue if it’s low. Let’s get started!
Check our gross revenue guide if you’re interested in learning about gross revenue.
Net revenue is sales minus allowances and discounts
Net revenue, also known as net sales, is the amount of money a company makes from its sales after subtracting allowances and discounts. These deductions include returns and damaged goods, promotional discounts, and other customer incentives.
Most businesses have net revenue as one of their key performance indicators, as it can give insight into the effectiveness of sales and marketing strategies.
How to calculate net revenue
To calculate your business net revenue, you need the following information:
- Total sales revenue for a given period
- Returns and allowances
- Sales discounts
- Any other incentives the business offers to customers
Here’s the formula for net revenue:
Net Revenue = Total Sales Revenue – (Returns + Allowances + Discounts)
For example, if a business had $100,000 in total sales revenue and $10,000 in returns, $400 in allowances, and $5,000 in discounts, its net revenue would be:
- Net Revenue = $100,000 – ($10,000 + $400 + $5,000)
- Net Revenue = $84,600
The importance of net revenue
Now that you know what net revenue is and how to calculate it, let’s discuss why it’s important. Here are a few points to note:
Net revenue gives insights into sales performance
Net revenue gives businesses a clear picture of their overall sales performance, as well as the success of specific marketing campaigns or product releases. It can also give insight into customer behaviour and preferences.
For example, if a business sees a decrease in net revenue, it can analyze the reasons for this and make changes to improve its sales.
Net revenue can impact business growth
Net revenue is also important because it directly impacts a business’s growth and profitability. For businesses to grow, they need to bring in more money than they spend on expenses.
Knowing your net revenue can help inform business decisions, such as investing in new marketing strategies or expanding to new markets.
For instance, if your business sees consistent growth in net revenue, you may decide to invest in expanding your product offerings or opening new locations.
Net revenue can attract or discourage investors
Net revenue can also be important for attracting potential investors or lenders. Investors want to see that a business is generating steady income, and net revenue can indicate the company’s financial health and growth potential.
On the other hand, a business with low net revenue or inconsistent sales performance may discourage investors from the company.
Who uses net revenue?
Net revenue is typically used by businesses and investors to evaluate a company’s overall performance and potential profitability. Government agencies and economists can also use it for economic analysis.
For example, a government agency may look at net revenue for businesses in a specific industry to assess the health of that industry. If net revenues are consistently decreasing, it could indicate a potential downturn in the industry. The government may then take steps to address this issue, such as implementing economic policies to support the industry.
Tips for improving your business net revenue
Now that we’ve gone over why net revenue is important, here are a few tips for improving your business’s net revenue:
- Offer promotions and discounts strategically. Offering too many promotions can lead to lower net revenue, so consider carefully when and how often to offer them. For example, it’s best to offer promotions during slower periods or on products with lower sales instead of consistently offering them across all products.
- Focus on customer retention. According to Business.com, returning customers typically spend up to 67% more than new customers. For example, if you have a new customer willing to spend $100 on a product, a repeat customer would pay up to $167 for the same product. Therefore, it’s crucial to keep existing customers satisfied and engaged with your brand.
- Consider expanding your product offerings or branching out into new markets. This can increase sales and overall net revenue.
- Improve customer service to increase customer satisfaction and loyalty. This will lead to repeat purchases and higher net revenue.
To summarize, net revenue is the total sales of a business minus allowances and discounts. It gives insights into a business’s overall performance and can impact its growth and attractiveness to investors.
Businesses, investors, and government agencies use net revenue for analysis and decision-making. Improving net revenue can be achieved through strategic promotions, customer retention, expanding products and markets, and improving customer service.