Gross revenue and net income: what is the distinction and the way to calculate it?

Knowing a company’s financial indicators is essential to understanding its current situation and facilitating decision-making. In this sense, knowing how to calculate gross and net revenue is crucial for managers.

Knowing about them allows you to visualize the financial health of the business and understand the results it has achieved. At the same time, it is important to note that there are significant differences between both concepts.

Read this article to understand what gross and net revenue are, the differences between them and how to calculate them in your company!

What is gross revenue?

Gross revenue represents the total financial amount that entered a company’s accounts from the marketing of its products and services over a given period.

It is linked to the organization’s core business and must be included in the income statement (DRE). Therefore, gross revenue represents the revenue obtained by the organization in the period analyzed.

Because of this, gross revenue is a relevant concept for evaluating a company’s finances. After all, it shows the amount of resources that are entering the cash register and whether current efforts have generated the expected returns.

Furthermore, gross revenue is calculated based on predetermined intervals — such as monthly, quarterly or half-yearly. In this way, the comparison between the information can be used to identify opportunities and risks for the company, such as those related to the seasonality of sales .

What is net income?

Net revenue, on the other hand, includes the resources that actually belong to the company. This is because they are calculated by applying deductions to gross revenue to find the company’s “clean” amount in a given period.

There are several deductions that affect the amount. In relation to taxes , the main ones are:

• Social Integration Program (PIS) : tax used to raise funds to finance unemployment insurance, benefits and participation in the revenue of agencies;
• Tax on the Circulation of Goods and Services (ICMS) : applied in the states on the transportation of goods and certain services;
• Contribution for Social Security Financing (COFINS) : is federal in nature and serves to finance Brazilian social security.

Taxes like these are levied on companies’ revenues — that is, on their gross income. In this way, they reduce the amount of money that will be available to businesses after the sale of their products and services.

In addition to taxes, other factors impact an organization’s revenue. There are aspects such as customer returns and discounted sales. Therefore, these should also be included in the calculation of net revenue.

What is the difference between them?

Now that you understand the concepts of gross and net revenue, it is worth knowing the differences between the two. While gross revenue considers what came into the cash register from the company’s core business, net revenue only calculates what was available to the organization.

As you can see, there is no way to know what the company’s net revenue was over a given period without first knowing its total revenue.

Furthermore, another difference between them is the information that can be generated for decision-making. For example, gross revenue can be used to visualize the company’s sales efforts.

When it is high, it can be a sign that work is on the right track. When the number is low, managers can understand that it is time to adopt new approaches in planning.

In turn, net revenue generates information that relates to the period after that moment. That is, when gross revenue is high and net revenue is low, there is an indication that there were many discounts on the company’s revenue. Therefore, it may be interesting to find out the reasons for the low performance.

If net revenue is lower due to high discounts, managers can think of new logics for pricing services, for example. Therefore, both concepts generate different insights for company planning.

How important are the two concepts in the company?

As you have seen, there are significant differences between the concepts of gross and net revenue. However, both are valuable elements for the company’s financial and accounting management.

Decision-making, for example, is a process made easier by understanding the two concepts. As you already know, knowledge about each one can provide specific insights into the organization’s needs.

Furthermore, gross and net revenue are important indicators for attracting investors to the company. This is because they evaluate the financial elements of the organization before making transactions with it — both on the stock exchange and outside of this environment.

How to calculate them in the company?

So far, you’ve learned the main elements of a company’s gross and net revenue. Now it’s time to learn how to calculate each of them.

Check it out!

How to calculate gross revenue

The first value to be calculated is gross revenue, since net revenue depends on this number. The formula is:

Gross revenue = Volume of products or services sold x Unit value

In other words, to find it, you need to know what the company’s sales were during the period and the price of each product. Multiplying the numbers will show the total amount that entered the cash register — or its revenue.

How to calculate net income

Once you have identified your gross revenue, you can calculate your net revenue. The formula will be:

Net Revenue = Gross Revenue – Deductions

Then, separate all the deductions that will affect the company’s revenue. Consider taxes, discounts applied at the time of sale, returned products and other discounts.

This way, you will be able to see how much money is left after all the discounts. To get the most out of both numbers, compare their evolution over the periods to identify trends, opportunities and risks.