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Money made from the products or services sold by your business is an important indicator of its overall financial health. In this article, we'll explore the different methods for calculating sales revenue, what they tell you about your business' performance and some tips on how to maximise your profitability on sales revenue as an international business.
By definition, sales revenue is the money made from the successful sale of your products or services.
It's important to understand the key differences between ‘sales revenue' and ‘revenue’, as the two terms are often used interchangeably but indicate very different things.
- Revenue is the total amount of income generated by a business during a period. This includes sales revenue i.e. money made from products and services (known as the business’ core activities), as well as other income streams like divident payments from investments, interest on bank accounts - these are known as “non-core activities”.
- Gross revenue is the total revenue generated in a specific a reporting period before any are deductions made.
This metric gives you an indication of how well your business is able to sell its products or services but it doesn't tell you enough to get visibility on your profitability.
- Net revenue is gross revenue minus any sales discounts and returns processed. This is the final amount of sales generated that a company reports on its income statement and is a more accurate view of money made from your customers.
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Sales revenue is at the top of income statement on the first line. It's one of the first starting points for calculating all other financial performance metrics including gross profit, operating income, and net profit.
All profitability ratios are expressed as a percentage of sales revenues, so a true and accurate picture is key to ensuring that performance measurement is done correctly.
Sales revenue is also one of the most important numbers used in forecasting. By looking at historical trends of sales revenue growth, small business owners can get a clearer picture of what the future could look like.
The sales revenue forecast impacts several other items on the income statement as well as many expenses including the cost of goods sold and other general administrative costs which are all expressed as a percentage of sales revenue.
Given the above applications and uses of sales revenue in financial statement analysis and forecasting, it is evident that sales revenue is the pivot around which the income statement is built, and P&L(profit and loss) is calculated.
The formula for sales revenue is relatively simple to calculate. At its core, sales revenue generated boils down to the average price that customers are willing to pay for a product or service multiplied by the number of units they are willing to buy. This is illustrated as below:
This formula is easy to calculate when a firm only has one product. However, it becomes progressively tougher when incremental products and services are added.
For companies with a product portfolio of 2 or more products, the individual sale price of each unit needs to be calculated to determine sales revenue.
An example is provided as below:
Imagine Magical Toys, a toy manufacturer that sells 2 products (Product A and Product B) in the same market. In one year:
- Product A sold 4,000 units at an average price of £20
- Product B sold 9,000 units at an average price of £8.
The calculation would be as follows:
Total Sales Revenue = Product A Revenue + Product B Revenue
To find the revenue of each product, we use the formula above:
- Product A Revenue = 4,000 x £20 = £80,000
- Product B Revenue = 9,000 x £8 = £72,000
Total Sales Revenue is therefore: £80,000 + £72,000 = £152,000.
If your business operates across international borders and uses different currencies, there are additional things to consider from both sales and expenses to in order to accurately calculate revenue from sales.
- Price differences in different jurisdictions - this is to align with the total costs incurred in each country
- Product sourcing costs from international locations
- Costs of operating offices, facilities, warehouses, and other outsourced business processes in foreign countries
While these costs are often significant, there are other smaller costs that may not be as distinct, but play just as big of a role in adding to overall costs when expanding into foreign jurisdictions. Some of these not-so-obvious costs are:
- Payments to suppliers/contractors
- Consolidating funds from overseas accounts which can be costly using traditional methods if you have to convert between currencies.
- Opening multi-currency banking accounts with local banks
Luckily, there is a solution! A Wise multi-currency account can streamline your international accounting and financial management. With the versatility that the account offers, you can manage 10 currencies under one account, thus reducing overhead costs when consolidating funds in different currencies.
This becomes especially important as you scale and enter new markets. Increased complexity usually brings increased costs. However, with Wise businesses can generate meaningful, recurring cost savings on the often unseen costs of expansion into new territories.
To end off, let’s discuss some ways that you can bolster your international business' sales revenue:
- Add new or unique products to grow sales from existing customers: By offering customers something distinctly different from the competition in the geography, your business might be in a better position to price it a higher, more premium figure which could have a significant impact on your overall revenue from sales.
- Expand to new geographies: By growing your business into attractive markets (either regionally or internationally), you can reach new customers and grow sales. Platforms like Amazon and eBay international provide a way to sell your products in other countries. This can be an easy way to test out your products in the international market.
- Focus on your marketing: A strong marketing presence can amplify your company’s brand with your target audience, and drive higher interest for your product.
- Partner with distributors: Local distributors often know their markets better than you as an outsider would. By collaborating with distributors, you can enter new markets more seamlessly, and leverage their knowledge and resources to build your market presence.
- Use a multi-currency account: We’ve discussed that having a multi-currency account could help streamline your international financial management - combine this with services like Wise and you could save money when paying overseas suppliers and contractors or receiving payments from abroad at a much cheaper rate than via banks or PayPal. This way, you can price your products more competitively across different locales making them more appealing to customers.
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from Wise Payments Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.
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