What is Total Revenue Formula in Economics and How to Calculate It?
In this article, we shall explain what is total revenue? Total revenue formula, the difference between net revenue and gross revenue. I shall guide you through every detail on how to calculate the total revenue for your business.
Let us start with the very basics.
What is total revenue?
The meaning of total revenue is simple, the total income generated by selling goods. Let’s explain it a little more.
Total revenue, also known as the income generated though total sales done by a particular company. It refers to the total income/revenue that a particular company generated from all sales of goods or services. Let’s take an example of an ice cream shop, for example, the total revenue would consist of all ice creams sold, not just the revenue you generated from the sales of one flavor or one type of ice-cream.
To explain it even more, let me take you on a more technical road.
Total revenue in economics refers to the total sales of goods or services of a company. It is the total income of a business and is evaluated by the following formula: Total Revenue = (the total quantity of goods sold) X (the price of the goods).
If Company A produces 100 shoes and sells them for $20 each, the total revenue would be 100 * $20 = $2,000.
There are two other key terms that revenue in economics usually involves.
- Average Revenue
- Marginal Revenue
Average Revenue (AR): It refers to the revenue collected by selling per unit of the total stock. It is calculated by dividing the total revenue by the total number of units/pieces sold of a particular stock.
Marginal Revenue (MR): It refers to the additional/extra revenue collected from selling an additional unit/piece of the stock. In other words, it’s the increase in total revenue from the sale of one more unit of a particular good.
Let’s suppose, if a Shoe Company sold one more shoe and their revenue increased from $2,000 to $5,020, the marginal revenue generated would be = $20.
Total revenue is a useful determinant in evaluating the financial health of a particular company. The company is generating more revenue if the value of total revenue is large. The calculation is very helpful when a company needs to cover up its expenses. Having large total revenue more than your expenses means you have enough income/revenue to afford expenses and stay afloat and profitable for the future.
Gross Revenue VS Net Revenue:
Net revenue and Gross Revenue play a significant part in any company’s finance. The better you understand the difference, the better clear you see the company’s revenue outlook.
Net Revenue is the amount you receive after deducting all expenses i.e. the production cost of goods sold from the total revenue.
Let us take the previous example of a shoe company, if that company is selling a pair of shoes for $40, the shipping cost, production cost, storage, and more expenses would be deducted from the $40 to calculate your actual net revenue. The income of the company should be much greater than its expenses to make a considerable profit.
Gross Revenue, on the other hand, is the revenue before the deduction of all expenses. If we use the example above, the gross revenue of the company would be $40 because there no deduction of expenses from the income.
The Gross revenue of a company can help investors and money lenders to see the financial outlook and the ability to turn a profit more accurately.
The chances of gaining a loan or investment increases exponentially if the total revenue is at a BIG level.
Significance of Expense calculation:
Expenses play a significant role in determining the financial outlook of a company. Although, the business owners do want their companies to be profitable and increase the ability to generate more revenue, but they need to focus on the expenses also.
The expenses of a company include building costs, employee salaries, office supplies, utility bills, and more. Some expenses are just one-time fees, but they do count.
Difference between Total and Gross Revenue:
There is a difference between Total and Gross Revenue. The Gross revenue shows the income generated by selling goods or services. The Total revenue, on the other hand, is the complete revenue of the company.
Formula to calculate total revenue:
In this section, we shall discuss the formula to calculate the total revenue. It is important to understand this formula so you can calculate the total revenue accurately.
Follow the steps below to calculate your company’s total revenue:
- The number of units and the per-unit price
The total revenue depends on two values: the total number of units sold, and the per-unit price.
- How to calculate the Total Revenue:
To calculate the total revenue, multiply the number of units by the per-unit price of the goods. To determine the total revenue interests or dividends should also be considered.
Total revenue = (price per unit) x (total number of units sold)
Here is another case if you have a services-based business. Replace the per-unit price with the per service price.
Total revenue = (price per services) x (total number of sold services)
The resulting value will be the total revenue. Make sure that you are including every monetary change of the company’s finances, big or small.
Always remember to include any kind of price change in to the calculations. For example, if you decide to change the price of a unit or a good, you need to necessarily include it because a small difference can skew the calculation completely.
Other factors are investment gains or dividend income that needed to be included in the calculations as well.
Total Revenue Calculation:
Here is an example of a total revenue calculation to guide you better:
Let’s suppose you have a shoe store and you are trying to decide whether to continue your business or close it down. This is why you need to calculate the total revenue of the business.
The first step is to determine the per-unit price and the number of units you have sold.
For example, you sold 50,000 shoe pairs on the average price of $5. The second step is to multiply the total units sold by the average price of each unit sold.
The formula will be:
TR = (total number of shoes sold) x (price per shoe pair)
TR = (50,000) x ($5)
Total Revenue (TR) = $250,000
Steps to take after total revenue calculation
The total revenue calculation plays a significant role in deciding the future of the business. If your business is making a good profit then you are good to continue if not then you should take some steps to make it profitable.
Once you have calculated the total revenue, you can determine the profitability by comparing the value to expenses. This will demonstrate the real picture of the business. If the expenses are greater than the total revenue then the business is facing a deficit. If not then your business is going on a good track.
By calculating the total revenue of the business you will be able to compare it to the previous years to determine any income/revenue growth through the past years. To evaluate this just subtract the current year’s total revenue from the previous years.
Keeping an eye on the total revenue is the key to determine the actual financial outlook. Having healthy cash flow and stable incoming and outgoing is the base of a strong business.