Revenue vs SalesWhat differentiates these two?

When you look at an income statement, what is the line item that is first listed?

Is it total expenses?

Is it net income?

Or is it gross profit?

Your answer is probably none of these.

And you’d be correct because the typical first line item in an income statement is revenue or sales.

But did you know that the terms “revenue” and “sales” have differences between them?

Most investors and analysts will interchangeably use revenue and sales thinking that they refer to the same thing.

Well, they’re not always wrong. In some cases, revenue and sales can practically be the same.

This occurs when the business in question only earns from the sale of its products (goods and services) and nothing else.

However, when the business has income sources other than its main operations, that’s when there becomes a difference between revenue and sales.

In this article, we will be talking about revenue and sales and then comparing them to each other.

What is revenue?

What makes it different from sales?

When we speak of the term “sales”, what are we referring to?

Can a business both have revenue and sales?

What do they mean for a business?

We will try to answer these questions as we go along with the article.

What is Revenue?

While there are those that refer to revenue as the business’s earnings from the sales of its products, revenue is more than that.

It accounts for all the money that a business earns which could include sales, income from an investment, rental income, and other sorts of income.

That being the case, some income statements only include what the business earns from its main operations as its revenue.

They have a separate line item for income from non-operating sources (typically referred to as other income).

Adding these two line items together should still result in a business’s total revenue.

It should represent the total earnings that the business made both from operating and non-operating activities.

Most businesses nowadays earn supplemental income in the form of investment income.

Some may even rent out a part of their property that they won’t use for operations in the near or far future.

For example, a bakery mainly earns revenue from the sale of its bread products.

However, it may also earn revenue if the bakery conducts baking seminars every now and then (for a fee).

Non-Operating Revenue

Businesses may earn income from non-operating activities.

For example, a business may earn interest income from lending its cash even if it’s not a bank or similar financial institution.

Even income from investments isn’t part of a business’s main operations. We refer to these earnings as non-operating revenue.

Some non-operating revenue may come from occasional events such as making a gain from the sale of a capital asset.

Businesses don’t usually sell their capital assets unless it’s time to replace or dispose of them.

Other non-operating revenue may be frequent such as when a business earns income from constantly lending some of its cash to one of its business partners.

While they may not be due to the main operations of the business, non-operating revenue can still contribute to cash inflow.

This is why it’s important to account for them. In times when operations are slow, a business may look into earning revenue from non-operating activities.

What is Sales?

Sales refer to the amount that a business earns from selling its products (goods or services).

It both accounts for cash and credit sales, so it doesn’t matter when the business receives the cash. What matter is when the business makes the sale.

In most cases, sales will be a major portion of a business’s revenue.

This is because most businesses earn a majority of their revenue from the sale of their products.

For a business to attain an optimal sales figure, it needs to consider several factors such as customer demand, appropriate pricing, etc.

If a business solely earns from the sale of its products, then its revenue and sales figures should be equal. Otherwise, they would be different.

Typically, the revenue figure should be greater than the sales figure.

However, there might be cases where sales exceed revenue.

This occurs when revenue factors in any sales return, discounts, and damaged merchandise in its calculation.

The resulting figure will be lesser than the business’s gross sales. Speaking of gross sales…

Gross Sales

Gross sales refer to the amount that a business earns from the sale of products without accounting for any sales return, discounts, and allowances.

It is simply the amount of money that the business will receive should it be able to collect 100% on all of the sales that it makes.

The thing with gross sales is that it doesn’t adjust for any reductions.

While it could show what the business would have earned if it collects 100% of all sales, it’s often not truly representative of what the business earns from its sales of products.

Any returns, discounts, and allowances will eat away at the amount that the business earns.

Thus, it’s important to look at a sales figure that considers these reductions…

Net Sales

Net sales is the sales figure that a business would arrive at after deducting sales returns, discounts, and allowances from gross sales.

It shows us a business’s net earnings from the sale of its products.

For example, let’s say that a business has gross sales of $80,000.

It also has sales returns of $2,000 and a sales discount of $1,000.

This means that its net sales amount to $77,000 ($80,000 – $2,000 – $1,000).

Revenue vs Sales

Now that we’ve both discussed revenue and sales, it’s time to compare them.

Revenue accounts for all the money that a business earns be it from operating or non-operating activities.

On the other hand, sales only account for what the business earns from the sale of its products (goods or services).

With this, we can say that sales is only a portion of a business’s revenue. Sales will always be revenue while revenue isn’t always sales.

A business’s sales figure is a more relevant indicator of its main operations rather than revenue.

This is because sales only account for the earnings a business makes from the sales of its products.

On the other hand, revenue may include non-operating income which could be one-time only. Thus, it may be inflated compared to sales.

Even with their differences, both revenue and sales are important figures for any investor.

They provide information about the business’s financial performance and condition.