What is revenue? And what it means for your business

Published Thursday 1st April 2025

What is revenue in accounting?

Revenue is the money a business earns from selling its products or services. For example, a bakery’s revenue comes from selling bread, while a freelancer earns revenue by providing services. It’s also called sales or turnover and is the starting point for calculating profit.

Why tracking revenue is important for your small business

Tracking your revenue isn't just about knowing how much money you bring in – it reveals trends, guides strategic decisions, and supports long-term growth. Tracking revenue is key to understanding business performance. It shows how much money is coming in before expenses are deducted, helping businesses measure growth, forecast earnings, and make financial decisions.

Drive business growth

Steady revenue growth supports long-term sustainability by providing resources to reinvest in opportunities, expand your scale operations, and attract investors.

For example, a bakery with a steady income might use surplus funds to open a second location, upgrade its equipment, or add new product lines.

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 these Xero’s 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 our revenue at play?

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?

Remember, though: revenue does not equal profitability. Learn more about increasing revenue.

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 the core income generated from your primary business activities. It’s often called gross revenue and is one of the most important metrics, forming the foundation of your business’s financial performance.

Examples include:

• Sales revenue: Income from selling goods and services, like a bakery selling bread and pastries.
• Service revenue: Earned by providing services such as consulting or repair work.
• Subscription revenue: Recurring income from subscription-based models, such as gym memberships 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 earning like:

• 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 is a key accounting principle that determines when revenue is recorded. Under accrual accounting, revenue is recognized when it is earned, even if payment is received later.

For example, a bakery delivers a bulk bread order to a cafe in July. Even though payment isn’t due until August, the revenue is recorded in July when the goods are delivered. This ensures that financial statements accurately reflect the business’s performance for the relevant period.

You should recognize revenue according to the Generally Accepted Accounting Principles (GAAP) rules.

Some small businesses, like sole traders, may use cash accounting, where revenue is recorded when payment is received, not when earned.

Here’s more about cash vs accrual accounting.

Revenue vs profit: Key differences

While revenue and profit are both financial metrics, they measure very different aspects of a business’s performance. Revenue shows how much money comes in, while profit reveals how much you actually keep after expenses.

Learn more about profit.

There are several key differences between revenue and profit.

Revenue:

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

Profit:

• Calculation: Profit = revenue – costs.

Learn more about calculating profits.

• Focus: Highlights income after deducting all costs.
• Income statement: Right at the bottom, so you often hear it called the “bottom line.”
• Significance: Shows a 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:

• 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:

• 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.

How to calculate revenue

Here are steps on how to calculate and track revenue:

1. Use the basic revenue formula to calculate

The first step in understanding your business’s income is calculating your revenue. The basic formula is:

Revenue = Units sold × Price per unit

For example, if a bakery sells 100 loaves of bread at $5 each, the revenue would be: 100 × $5 = $500

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.

Using ecommerce platforms or accounting software, like Xero, will help simplify the process.

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 small businesses, but prone to errors and time-consuming)
• Point of Sale (POS) Systems (Great for physical stores, integrates sales data automatically)
• Accounting Software (Xero, QuickBooks, etc.)(Best for automation, 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.

Best practices for effective revenue tracking

Your financial statements are only as reliable as the data you input. Inaccurate revenue tracking can lead to poor decision-making, cash flow problems, and even tax compliance issues. To ensure accuracy, follow these best practices.

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, your business 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 started with Xero