Every business organization wants to and operates to earn money. A company won’t exist if it does not earn money for its products and services. Although all companies are not for profit, they must still earn money for their existence. When we talk about earning money from organizations, we are essentially talking about revenue.
Revenue is a very important topic for businesses because the whole existence of the business depends on it. Without revenues, businesses cannot exist or keep running. Although some analysts believe that it is profit that makes sense more than revenues in a business’s operation, profit is a part of revenues earned. Therefore, companies that want to earn profit must earn substantial revenues that exceed their total expenses.
Revenue is the total amount of money earned by operating a business. Organizations use businesses in various ways, but their ultimate aim is to earn money. This total amount of earned money by businesses is called revenue. Revenue can sometimes also be called sales as the sales figure is representative of the total amount of money generated by a business in a certain period of time.
Revenue is the money accumulated and earned by a company through its business activities. Revenues can be calculated in various ways depending on the types of business activities of the organizations. It must be noted here that accrual accounting latkes care of the revenues made for sales on credit the payment of which is not received yet.
The cash flow statement offers insight into the collection of the money that is owed by the company. However, it will record revenue only when the cash is received. Therefore, the receipt is a form of cash that is paid to the company. There are possibilities of having receipts without collecting money or cash.
For example, when a customer pays in advance without receiving the product then it will create a receipt without revenue.
Revenue is mentioned at the top of the income statement of a company. Net income is the amount obtained after deducting all expenses from the revenue and is mentioned at the bottom of the income statement. If revenue exceeds net income, the organization makes a profit. Every company wants to maximize its profits by increasing revenue and decreasing expenses.
Investors usually look at revenue and net income when they judge the health of a company. When efficient cost-cutting measures are employed, the company can increase its net income and grow steadily.
On the other hand, if expenses are too much, the revenues of companies come down which is not an ideal situation for investors to invest in a company.
The various types of Revenue are as follows −
Total Revenue
Average Revenue
Marginal Revenue
As the name suggests, total revenue is the grand total of money earned by selling the maximum amount of products by a company. The total revenue is a sum that is the maximum a business organization earns from its sales. When the number of products sold is multiplied by the price of the product we get total revenue.
Example
Suppose, the price of commodities of a company is p and the number of commodities sold is q for a company.
Then, the total revenue of the company is $p\times q$.
Therefore, Total Revenue (TR) is the revenue that is obtained by the multiplication of the price of the commodity and the number of items sold.
Total revenue is significant because it shows the size of the business of a company. The amount of TR is an indicator of how much total business an organization performs, expressed as its revenue. TR is independent of the product attributes and is dependent on only the price and quantity of goods.
In simpler words, the TR is the amount obtained by the multiplication of the market price (P) of a commodity multiplied by the output of the enterprise (Q).
$$\mathrm{TR\:=\:P\times Q}$$
The average revenue is the revenue earned on an average on the total amount of commodities sold. As the name suggests, it is the average of revenues. When we calculate the average revenue, we tend to find the revenue that is obtained for each commodity. Therefore, average revenue can be considered the revenue earned from each commodity that is sold in the market.
The average revenue contributes holistically to the profit of the companies. While calculating average revenue, the average cost of the commodity is deducted from the average revenue. Therefore, it is clear that the more commodity is sold, the more profitable it is for the company.
$$\mathrm{AR\:=\:\frac{TR}{q}\:=\:\frac{pq}{q}\:=\:p}$$
Where
TR is the total revenue,
p is the price of each commodity and
q is the number of commodities sold.
Marginal revenue is the revenue earned on the sale of an extra unit of commodity. When the company sells an extra item in the market, its revenue is recorded as marginal revenue. Marginal revenue helps the management to determine the price of a new product or commodity, plan the commodity’s production schedule, and analyze customer demands.
Marginal revenue obeys the law of diminishing returns. According to this law, the marginal revenue of a product remains constant up to a certain extent of output, and then it slows down as output increases. Marginal revenue can be considered the change in total revenue in comparison to the change in the quantity of the product. When the total revenue goes up, marginal revenue also increases. The marginal revenue is therefore proportional to the changes in total revenue.
Generally, a company would like to earn operating revenue more than non-operating ones during its operation. Let us see the other reasons in the table below.
| Operating Revenue | Non-Operating revenue |
|---|---|
| Operating revenue is the one that is obtained from the core business practices of a company. | On the other hand, non-operating revenue is the revenue that is obtained from secondary sources. |
| For example, if a business sells automobiles, then the revenue obtained from the sale of the cars would be operating revenue. | On the contrary, if the company rents a portion of its production facility, then the rent it earns would be non-operating revenue. |
| Operating revenues are common and they incur serially. As operating revenue is related to the core of a business, they are considered more important than non-operating income. | Non-operating revenue is often hard to predict as they do not incur more often. That is why they are sometimes called one-time gains. |
Revenues are put at the top of the income statement, which shows their importance for businesses. Investors often tend to look at the revenues and net income of a company to check the financial health of the companies in which they will invest their money. If the revenue does not grow over time, a company is considered static in terms of growth.
That is why all companies try to improve their revenue figures over the quarterly reports of their businesses. It is therefore not an exaggeration to say that revenue is the lifeblood of business organizations.
Qns 1. Which is the most important among total, average, and marginal revenues for a business firm?
Ans. Total revenue is by far the most important revenue for businesses as it shows the overall performance of the business.
Qns 2. How to get the figure of revenue when the number of goods sold and the price of goods are available?
Ans. Revenue = price x number of goods sold, this equation can be used to calculate revenue.
Qns 3. Can a company earn good revenues but still incur losses?
Ans. Whatever the amount of revenue earned by a company, if it is less than the expenses incurred, the company will suffer a loss.
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