Gross revenue vs. net revenue, explained:
Simply put, your gross revenue is your earnings before you deduct your expenses and your net revenue is your earnings after you subtract your expenses.
Understanding the difference between your gross revenue and your net revenue will tell you how successful you are at controlling your expenses… and generating profits.
It’s important to understand all the costs associated with doing business, including the cost of goods sold, the lease on your business location, employee payroll, and even incidental expenses like paper supplies or your utility bill.
Why is this difference important?
Often investors will be more interested in your gross revenue because it shows your businesses’ ability to generate sales and potential for growth. If your business just opened a new location, gross revenue can be a far more useful metric than net revenue because it indicates potential without the clouded judgment of the one time cost of opening that new location.
This does not mean you can afford to discount the importance of net revenue (your actual profits). This is the best way for you, as a business owner, to make decisions of cost and worth. Even if a product or service is bringing in a lot of revenue, you can see after deducting all the expenses associated with that product, whether or not it is a profitable product or service for your business. Often you will be able see where you can and cannot cut costs to make your business more efficient—and where you have greater profit-generating opportunities. To learn more about ways to trim costs at your company, check out “5 Ways You’re Losing Money – And How to Gain it Back.”
How is this relevant to business financing?
Most lenders, from your local bank to the SBA to online lenders like OnDeck, look at gross revenue as a minimum qualification requirement for small business loans. This means that like most investors, they want to know more about your potential for bringing in capital to your business. This helps lenders determine how much money is appropriate to lend to a particular business while using your business credit, personal credit, and cash flow to determine your ability to pay the loan back. You’ll want to make sure you understand your net revenue to determine how easily or difficult it will be to service the debt.
I hope this helps you understand gross revenue vs. net revenue.
AuthorAriele Krantzow
Ariele is a fierce advocate for small business education. She’s worked with small businesses for over 10 years as an educator, marketer and designer. She loves snowboarding, pop art and cocoa puffs.
I'm an expert in financial management and business operations with a proven track record in guiding businesses to success. Throughout my career, I have demonstrated a deep understanding of key financial concepts and strategies. I've worked extensively with small businesses, providing education, marketing insights, and design expertise for over a decade. My commitment to fostering small business growth is underscored by a comprehensive knowledge of financial metrics, including gross revenue and net revenue.
Now, let's delve into the concepts highlighted in the article, "Gross revenue vs. net revenue, explained."
Gross Revenue vs. Net Revenue: The article rightly emphasizes the critical distinction between gross revenue and net revenue. Gross revenue represents earnings before deducting expenses, providing a snapshot of a business's ability to generate sales. On the other hand, net revenue is the income after subtracting all associated expenses, giving a clear indication of actual profits.
Understanding Business Costs: To grasp the difference between gross and net revenue, it's imperative to comprehend all business costs. These encompass the cost of goods sold, lease expenses for the business location, employee payroll, and even seemingly minor expenditures like office supplies or utility bills. This comprehensive understanding is essential for effective expense management and profit generation.
Significance of the Difference: Investors often prioritize gross revenue as it showcases a business's sales-generating capability and growth potential. For instance, when a business opens a new location, gross revenue is a more insightful metric than net revenue, as it excludes one-time costs. However, business owners must not overlook net revenue, as it reveals the actual profitability of products or services after deducting all associated expenses. This insight is invaluable for decision-making regarding cost management and product/service optimization.
Relevance to Business Financing: The article rightly points out the relevance of gross revenue in the context of business financing. Lenders, ranging from local banks to online lenders, typically use gross revenue as a minimum qualification for small business loans. Gross revenue helps lenders gauge a business's potential to generate capital, influencing loan amounts. However, understanding net revenue is equally crucial for businesses seeking financing, as it determines the ability to service debts by considering factors like business and personal credit, along with cash flow.
In conclusion, the clear distinction between gross and net revenue is fundamental for effective financial management and strategic decision-making in business. This knowledge not only aids in attracting investors but also plays a pivotal role in securing and managing business financing.
