What is Revenue? Formulas and Standard Calculation from A–Z

Revenue is a crucial indicator that reflects a business’s performance and financial health. Understanding what revenue is, its different types, and how to calculate it accurately will help businesses control cash flow and make appropriate decisions. In this article, 1Office will provide a detailed guide from the concept to the revenue calculation formula, with easy-to-understand examples.

1. What is revenue?

Revenue (according to standards like VAS 01) is the total value of economic benefits a business earns during an accounting period. It includes income generated from normal production and business activities, as well as other activities of the business, which contribute to an increase in owner’s equity. This does not include capital from shareholders or owners.

Simply put, revenue is the total amount of money received from selling goods, providing services, and other business activities. In a business environment, revenue plays a crucial role and is the primary factor determining a company’s survival and profitability.

>>> See more: 7 Sales Revenue Report Templates in Excel | Free Download

2. Common types of revenue in finance

A company’s revenue reflects its business operations at a specific point in time. This revenue can be generated from various sources, including:

• Revenue from sales activities: This is the main revenue from selling products that the business manufactures or imports and then sells to the market.
• Revenue from providing services: revenue from tourism services, contract manufacturing, agencies, etc.
• Internal revenue: The amount of money received from internal sales and consumption between units within the company.
• Revenue from financial activities: Includes income from asset rentals, interest from loans, and profits from investment activities such as government bonds or securities.
• Revenue from extraordinary activities: These are amounts received from infrequent events such as selling surplus assets, liquidating assets, or debts that have been repaid after a long period.

Through these revenue sources, a business can assess its performance and financial situation.

3. The most standard way to calculate revenue

Each business often has its own way of calculating revenue, depending on various factors such as scale, product/service quality, and business model. Below are some basic revenue calculation formulas that can be applied to many business units:

• For product sales activities: 

Revenue = selling price x quantity sold

• For businesses providing services: 

Revenue = number of customers x service price

These are just basic formulas, and in practice, businesses can adjust them to accurately reflect their operations. The scale of the business, business strategy, and market environment all affect how revenue is calculated and profits are optimized.

>>> See more: What is Net Revenue? The Most Accurate Way to Calculate Net Revenue

4. What are revenue deductions?

Revenue deductions are adjustments subtracted from gross revenue to reflect the actual value a business receives from its operations. Recording these deductions helps make financial statements more accurate, avoids overstating revenue, and provides a transparent basis for calculating profit and taxes.

4.1. Trade discount

A trade discount is a price reduction that a business offers to customers who purchase goods in large quantities. In cases where a customer qualifies for a trade discount after multiple purchases, this discount amount is deducted from the final selling price recorded on the “VAT Invoice” or “Sales Invoice.” If the customer stops purchasing or the trade discount exceeds the selling price on the final invoice, the business must pay the trade discount amount to the customer.

When a customer buys in large quantities and receives a trade discount, the selling price on the invoice is the reduced price (after deducting the trade discount), and this discount is not recorded in the accounts. Sales revenue is reflected at the price adjusted for the trade discount.

4.2 Sales allowance

A sales allowance is typically applied when goods or services do not meet expected quality, fail to conform to specifications, or do not correctly meet the customer’s needs and desires. This is a price reduction measure for customers to compensate for the shortcomings of the product or service they have purchased.

When a customer reports unsatisfactory quality, a business may decide to offer a sales allowance to retain the customer and resolve the situation amicably. The decision to offer a discount can also be a measure to minimize losses and maintain the business’s reputation in the market.

A sales allowance policy can be implemented through a direct discount on the listed price or through other incentives such as a discount voucher for the next purchase. This helps create fairness and satisfaction for the customer during the sales transaction.

4.3 Value of returned goods

The value of returned goods is the amount corresponding to the volume of goods that were confirmed as sold but were later returned by the customer, who refused payment. Handling returned goods requires transparency and a precise process to ensure that all transactions are recorded correctly.

When goods are returned, the buyer needs to submit a written request, clearly describing the reason for the return, the quantity of goods, and the value of the returned goods. If the return applies to the entire order, the invoice can be attached. If only a portion of the goods is returned, the seller may request a copy of the contract.

For the best transparency and control, businesses need to link this to warehouse re-entry documents and accurately confirm the quantity of goods that have been returned. This process helps ensure that the value of returned goods is handled correctly in the business’s accounting and financial management processes.

4.4 Special Consumption Tax, Export Tax, VAT calculated using the direct method

Special Consumption Tax is determined based on the quantity of goods consumed, the taxable price, and the tax rate for each item. This is a type of tax levied directly on goods and services, applied at a single stage in the production or import process. Special Consumption Tax is usually included in the selling price of the product, forming part of the final price that the consumer pays.

Export tax, conversely, is a tax that a business must pay when exporting a specific type of good. This can be a significant part of the export cost and affects the final price of the product on the international market.

Value-added tax (VAT) calculated using the direct method is applied to the value-added portion of goods and services during the production and circulation process up to consumption. VAT is calculated based on the value added at each stage of the supply chain, and this cost is usually passed on to the final price of the product, from the producer to the consumer.

5. What is the significance of revenue?

For a business, revenue is not just an income source to cover business-related expenses like rent, state fees, and taxes, but it also plays a crucial role in sustaining and developing the enterprise.

For a business, revenue is not only a source of income but also working capital, helping the business maintain its operations. This is significant in avoiding the need to borrow capital to sustain daily activities.

Additionally, revenue plays an important role in the business development process. It helps the business promote reinvestment, expand its scale, and enter new business areas. Having stable revenue helps a business be more autonomous, not overly dependent on borrowing capital, and enhances its competitiveness in the market.

5.1 Revenue from sales activities

Revenue from sales activities is the total value of profits that a business earns or expects to earn from the sale of goods, products, and services. This is a crucial financial source that helps the business cover costs related to business and production activities.

This source of income includes both primary revenue and other surcharges. Revenue from sales activities plays a vital role in sustaining and developing the business. It helps the business reduce financial pressure and avoid over-reliance on external borrowed capital, thereby reducing costs associated with borrowing.

Revenue from sales activities is not just a source of income but also a determining factor in the financial health and competitiveness of the business in the market.

5.2 Revenue from financial activities

A company’s financial revenue includes various sources of income. This can be interest, dividends received from profit sharing, as well as income related to investment activities such as securities trading, capital recovery, and asset liquidation. In addition, financial revenue also includes income from investments in joint ventures, as well as profits from exchange rate gains, foreign currency sales differences, capital transfers, and other financial income.

This means that financial revenue is not just income from interest or dividends, but is also related to the diverse financial transactions and activities of the business. This highlights the importance of the financial aspect in generating income and contributing to the overall financial health of the company.

5.3. Internal revenue

Internal revenue is the amount of money earned from selling goods, products, or providing services within the company or corporation. This is an important part of revenue, often reflecting business transactions between subsidiaries or different departments of the same organization.

Typically, internal revenue is recognized when the transfer of profits and risks associated with the goods or services is completed and they are provided to buyers who are internal members of the organization, such as employees. This helps the business evaluate and monitor its internal business situation, while also managing and controlling transactions between different units or departments within the organization.

5.4 Unusual revenue

Unusual revenue is the amount of money earned from non-recurring business activities. This may include the sale of surplus materials, assets, or the liquidation of unnecessary assets. In addition, unusual revenue can also arise from payables that do not require payment. These are infrequent business transactions and do not reflect the official revenue from the company’s daily business operations.

6. Strategies from large enterprises to boost revenue

First, correctly identify the target customer group. Customers are the decisive factor in the formula for generating revenue for a business. Understanding customer psychology is the key to success. When a business has a deep insight into the needs and desires of its customers, it can apply effective sales policies. By clearly defining the customer group that is suitable for the product or service, the business can easily attract customers and provide optimal value to them.

Second, focus on customer feedback. Post-purchase customer care is a crucial part, as this is when customers share their reviews and feedback on products and services. By listening carefully to these opinions, the business can recognize its strengths and weaknesses, and from there, propose improvements and develop guidelines.

Third, enhance sales activities. Revenue is primarily generated from sales activities, and to increase revenue, it is necessary to ensure the quality of products, services, and the performance of the sales team. The quality of packaging also plays an important role. On-time and high-quality delivery will create a positive impression, helping to maintain and develop relationships with customers, encouraging them to continue shopping and using the products. This means not only selling products but also maintaining customer satisfaction and loyalty.

Fourth, increase the purchase conversion rate. The purchase conversion rate is the ratio of customers who transition from having no need to having a need to buy, and from having a need to buy to actually making a purchase. To increase the purchase conversion rate, training and guiding sales staff is important. Sales staff need to have skills to persuade customers, approach them intelligently, and leverage incentive strategies to encourage purchasing behavior. This helps increase revenue by generating more orders and increasing customer satisfaction and loyalty.

Fifth, increase order value and encourage customer return. In sales strategy, applying forms such as combos, promotional packages, membership programs, free shipping, etc., helps create the impression that the more customers buy, the higher the order value will be, while also encouraging them to return frequently. Increasing order value not only brings in more revenue but also promotes the rapid development and growth of the business.

Managing the loyal customer base is key to saving on advertising costs, new customer acquisition costs, and marketing expenses. The loyalty of returning customers means the business has the opportunity to significantly increase revenue. To encourage customers to return, businesses need to create a positive shopping experience, build friendly relationships, and make customers want to come back to purchase again.

Sixth, researching competitors is a crucial step to understand the market and improve business strategy. In the business environment, competition is inevitable. By researching competitors, a business can compare prices, product quality, and customer experience to assess its own strengths and weaknesses. Through this, the business can optimize its competitive advantages.

Competitor research also helps a business learn from the successes and failures of its rivals. This will help the business adjust product quality, increase supply output, and optimize its business strategy. By doing so, the business can gain an advantage and grow stronger in a competitive market.

7. Revenue and its relationship with profit

Revenue and profit are two fundamental financial metrics, but they have different roles and meanings. Revenue reflects the total value of money or equivalents a business earns from its business activities, while profit is the remainder after deducting all costs, taxes, and deductions from revenue.

Understanding this relationship helps businesses assess their actual performance and make strategic decisions. Specifically:

• Impact of costs and deductions on profit: Production, operating, marketing costs, employee salaries, rent, etc., all reduce profit relative to revenue. Additionally, revenue deductions such as discounts, returned goods, and taxes also have a direct impact.
• High revenue doesn’t guarantee high profit: A business with large revenue but excessively high operating costs may still record low or negative profit. This highlights the importance of cost control and resource optimization.

Illustrative example: An electronics store records 10 billion VND in revenue for the month, but the costs of goods, rent, labor, and advertising amount to 9.2 billion VND. The actual profit is only 0.8 billion VND, despite the high revenue.

Clearly understanding the relationship between revenue and profit helps businesses manage cash flow effectively, accurately assess operational performance, and plan for sustainable growth.

8. Common Mistakes When Calculating Revenue

In practice, many businesses make basic mistakes when recording and calculating revenue, leading to inaccurate financial reports that affect business decisions and legal compliance. Common mistakes include:

• Recognizing unearned revenue or revenue without sufficient legal basis: For example, recognizing revenue from undelivered orders, uninvoiced sales, or incomplete contracts leads to inflated revenue and audit risks.

• Failing to subtract deductions: If trade discounts, sales allowances, returned goods, and direct taxes are not deducted, the actual revenue will be inflated, distorting profit and business performance assessments.

• Lack of control over internal and unusual revenue: Internal revenue between departments or subsidiaries must be eliminated during consolidation to avoid double counting. Unusual revenue, such as from selling fixed assets or receiving contract penalties, also needs to be clearly classified to avoid distorting the total revenue report.

Understanding and avoiding these mistakes helps businesses improve the accuracy of their financial reports, reduce legal risks, and make more effective business decisions.

9. Frequently Asked Questions

Can a business still lose money even if revenue increases?
Yes. Revenue only reflects the money generated from business activities, while profitability also depends on the cost of goods sold, operating expenses, selling expenses, administrative expenses, and many other factors. Therefore, an increase in revenue does not necessarily mean an increase in business performance.

Should revenue be managed with Excel or software?

Excel is suitable for small amounts of data. However, when a business has multiple departments, numerous sales channels, and needs real-time tracking, software provides more centralized and synchronized management. 1Office sales management software is a solution worth considering if your business wants to visually track revenue on a dashboard, update data quickly, and use AI to assist in extracting information for managers and CEOs.

Should revenue KPIs be set for every department in the company?

This shouldn’t be applied rigidly. Revenue is typically a direct target for the sales department, but other departments should still have indirectly related KPIs such as the number of leads, customer retention rate, order processing speed, or debt collection rate.

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In summary, 1Office has compiled comprehensive information on what revenue is and the key principles related to it. This article has helped businesses gain a detailed understanding of the importance of revenue in business operations. Furthermore, we have provided useful plans and strategies to help businesses grow their revenue effectively. We hope this information will be a valuable resource for your business’s development.

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