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# How To Measure Total Revenue and Reveal the Financial Health of Your Business

## Failing to forecast revenue accurately can result in cash flow problems, inventory issues, and reduced operational efficiency.

Total revenue is an essential indicator of a company’s financial health. It gauges the health of your business, offering insights into sales performance, market dynamics, and revenue leakage. Understanding how to calculate total revenue will reveal the actions you need to take to improve your sales.

Read on to learn how to calculate total revenue and use this essential metric for driving sales — and improving your bottom line.

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## What is total revenue?

Total revenue is the entire sum of income generated by a company’s activities, measured over a specific period of time — usually monthly, quarterly, or annually. It includes the income generated from the sales of products or services. It does not include income from sources that are not directly connected to business operations, like interest, royalties, and dividends. Expenses must also be deducted from the sum of total revenue. These expenses include things like the cost of goods sold (COGS), operating expenses, and taxes.

## What is the total revenue formula?

If you want to know the volume of products or services that your company has sold, you need to know the total revenue formula. Fortunately, calculating total revenue is straightforward — just multiply the number of units sold by the price per unit. Here’s how the total revenue formula looks as an equation:

Quantity sold × Price per unit = Total revenue

For example, if a skateboard company sells 100 boards at \$89 each, the total revenue would be: \$8900. Here’s how the formula looks as an equation:

100 boards sold × \$89 = \$8900

## Total revenue versus net revenue

Net revenue is the money left over after subtracting deductions — such as discounts, returns, and allowances — from total revenue. It provides a clearer picture of a company’s true earning power and reflects the actual amount of money a company generates from selling its goods or services.

Taxes are not typically deducted from revenue to calculate net revenue. Instead, taxes are considered an expense and are factored into the calculation of net income.

Net income — otherwise known as the bottom line — is the total profit a company earns after deducting all expenses, including operating expenses, interest, taxes, and other non-operating expenses from its total revenue.

## Why is total revenue important?

Total revenue is an essential metric because it helps to assess the overall performance of a company. Measured over time, the total revenue reveals which products or services are selling well and what needs review.

Businesses that are publicly traded are usually required to present total revenue on a quarterly basis. At the end of the year, most companies will review their total revenue to assess how much money came in. These reviews can reveal a number that’s very different from what they thought their total revenue would be.

If a business fails to forecast its revenue accurately, it can result in cash flow problems and inventory issues as well as reduce operational efficiency. It can also make investors nervous because they rely on accurate forecasts to make their investment decisions. If a business over-promises and under-delivers with its forecasts, investors will lose trust and put their money elsewhere.

The inadvertent loss of money due to sales hiccups, admin errors, or external factors can make a dent in a company’s total revenue. Most businesses are focused on ways to increase revenue — they work on strategies to drive more sales. Meanwhile, they’re oblivious to the fact that they’re leaking money.

For example, you sign an agreement with a company, and they agree to pay you \$100,000 for your product or service. Occasionally, the contracted value of what you were supposed to sell gets billed incorrectly. This happens for a variety of reasons: the contract could be hard to understand, the timing for collections might be off, or the company didn’t account for a cost of living increase.

Cost of living increases in a contract can be two or three percent and that’s money that’s often never billed to the client. Reviewing total revenue is a great way for companies to audit what they thought would happen instead of what did happen.

Total revenue also helps with:

• Sizing up the competition: Sales leaders have a clear understanding of their market position when they measure the total revenue of their company against others in the industry.
• Forecasts: Total sales revenue data provides valuable insights for forecasting future sales and developing sales strategies.
• Communication: Total revenue is a key metric used to communicate financial performance to investors, shareholders, and other stakeholders.
• Incentives: Offering a sales commission, based on the total revenue a salesperson generates, motivates them to hit higher sales targets.

## Ways to increase total revenue

Depending on your industry, there are many variables that can impact total revenue. These can include consumer demand for your product or service, the price you charge, and the quantity sold. Macroeconomics that are beyond a company’s control, such as interest rates, also play a role in the revenue received.

Most companies are just trying to manage the gap between their expenses and revenue to make sure that they have enough cash for them to continue operating — and to reinvest into the business. And if you’re in a highly competitive industry, then your competitors can drop their price to try to win business from you. That will lower your overall revenues as well.

Even during times of economic uncertainty, there are ways to increase total revenue:

1. Increase prices: While not a popular option, judiciously raising the price of a product or service — especially if demand remains relatively high — can lead to higher total revenue.
2. Increase sales volume: Selling more units of a product or service directly increases total revenue.
3. Innovate: Attract more customers and boost total revenue by introducing new and improved products or services.
4. Advertise: Investing in effective marketing campaigns can stimulate demand and lead to increased sales.
5. Expand market reach: Entering new territories can broaden the customer base and drive revenue growth.
6. Improve quality: Better products or services lead to higher customer satisfaction, resulting in repeat purchases and increased revenue.
7. Cross-sell and upsell: Offer complementary products or services and upgrades to increase the average transaction value and total revenue per customer.
8. Optimize pricing strategies: Implementing dynamic pricing, personalized discounts, bundling, or subscription products or services can encourage more purchases and increase total revenue.
9. Keep customers returning: Loyalty programs, exceptional customer service, and personalized experiences all lead to repeat business and higher customer lifetime value (CLV). Tracking CLV helps you retain existing buyers and generate loyalty, according to research firm Gartner.
10. Build alliances: Collaborating with other businesses using partner relationship management software can expand market reach, offer complementary products or services, and generate additional revenue streams.
11. Offer special events: Holidays are an ideal opportunity to generate a spike in revenue by offering special promotions or exclusive events — but don’t get carried away with discounting. While it may be tempting to slash prices to drive traffic, be mindful of what those bargains really mean for your bottom line.

## Managing contracts and understanding their effect

It’s important to remember that proposals do not equal revenue. When you put together a sales proposal, you have the total cost of the solution that will — you hope — become revenue if you implement it well and everything works correctly.

Knowing your revenue shows where you can find gaps in revenue leakage. That’s really important for all companies — and as a revenue officer, I want to make sure that I try to prevent leakage anywhere I can.

In order to increase total revenue, it’s essential for companies to carefully manage their contracts in order to collect the money they’re owed. CRM software is the number one tool for companies to use to document agreements with clients. It outlines for both parties exactly what’s being purchased — and how much it’s being purchased for.

Many sales organizations have high turnover, so it’s helpful to create contracts within the CRM software. That way, when a new person comes in, they can quickly find the contract, and everyone’s working off the same document.

And with revenue intelligence, CRM software provides insights that help sales teams close revenue gaps. It can also help uncover risks and opportunities in deals before they’re signed. Another advantage of creating contracts with CRM software is you can trace back the path you took to actually get the deal signed — and tweak and improve your next contract.

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## Total revenue examples

Here are two examples of applying the total revenue formula:

### Retail

During the summertime, Joe’s T-shirt Shack on the boardwalk does a brisk business. Joe offers t-shirts and tank tops personalized with colorful airbrushed names. On a typical Tuesday, he sells 10 custom t-shirts that cost \$20 each and 15 tank tops that cost \$10 each. To calculate the total revenue, Joe multiplies 10 by \$20 and 15 by \$10. Here’s the formula:

Number of products sold x Price per product = Total Revenue

Then, Joe adds both totals together. His total revenue would be \$350.

(10 x \$20) + (15 x \$10) = \$350

### SaaS

Sandra sells subscription-based software that she developed in her garage. It has three pricing tiers, ranging from \$30-50 a month. To calculate total revenue, Sandra multiplies the number of customers that she served during the last statement period by the average price for her service. Here’s the formula:

Number of customers x Average price of service = Total revenue

During her last statement period, Sandra’s company served 1000 customers, who paid an average of \$40 per month, resulting in \$4000 in revenue.

1000 x 40 = \$4000

Total revenue is an essential indicator of a company’s financial health. And while total revenue doesn’t tell the whole story, it can help measure cash flow and indicate the demand for your company’s products or services.

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