We have probably all heard the word revenue before, but maybe the exact meaning has escaped us. In business terms, revenue is money or income that is generated as a result of normal business activities. The activities usually include the sale of goods and services. Revenue can also come from different sources as well. Some companies receive revenue in the form of interest, dividends, or royalties paid to them by other companies.
It is highly important to calculate revenue correctly because it is a critical part of financial analysis. The health of a company is measured in part by its asset inflows (revenues) as compared to its asset outflows (expenses). Net income is what happens when you subtract expenses from your revenue.
If a company wants to be attractive to investors, it is very important to have consistent revenue and income growth. Revenue is also a factor in reviewing a company’s earning quality. There are a number of financially ratios used to calculate this and the most important one being gross margin and profit margin.
Depending on the company, revenue can be documented in a couple of different ways. It can be listed as “received” or “recognized” on financial statements. When a deal is signed between two entities, a company may choose to “recognize” revenue at this point.
The manner in which revenue can be documented will depend on the accounting method the company has chosen to use.