The money earned by your small business is the lynchpin of its survival. This means it's vital to understand all the types of income you may bring in, how they affect your bottom line, and the important differences between them. Here's what every small business owner needs to know about revenue and sales in bookkeeping — and why they aren't the same things.
Why Revenue Isn't Sales
Many people speak of revenue and sales interchangeably. And while they are inextricably linked, they aren't quite the same. Revenue encompasses all the various types of income your business brings in, while sales refers to only one type. Therefore, all sales are revenue but not all revenue is sales. Revenue can also include things like interest from investments, sales of assets, and one-time events.
Why Product Sales and Service Matter
Even within the category of sales, there are different types of revenue. In general, a company may derive revenue from product sales or sales of its services. Some companies have strictly one form of revenue, but most get a combination of income from both. Why does it matter? Primarily, this is because each may be taxed differently by the IRS and because the cost of producing each varies.
Consider a company that sells rugs and provides repairs and maintenance for rugs. What does it cost to produce one rug? While you may invest more in materials, you can also reduce individual costs through bulk production. However, servicing the rugs must be done on an individual level — but you may not have to spend as much to perform the service.
Why Revenue Type Is Important
As evidenced by the difference between service and product sales, the type of revenue matters. For instance, if you sell a piece of unused heavy equipment, your books may look very positive at the end of the year. However, that one-time sale may be masking a drop in actual profit from your products. Without discerning the forces at play, you can't fix the profit margin. Next year could be very challenging.
In addition, only by understanding the actual expenses and income from each type of revenue can you fully understand your profit margin. The rug company above might find that their profit margin on servicing the rugs outweighs the profit margin on creating them. They can then adjust their business operation to focus more on this aspect of the business. Or they might put effort into improving the latter's profit.
Where You Can Learn More
Could your business benefit from greater detail about how it earns its revenue? Do you want help making adjustments based on what you learn? Start by meeting with a bookkeeping provider in your state today.
Share15 November 2022
One thing I have always been good with is money. Even in high school, I always had a savings from my allowance and from working for the neighbors. I created this blog to help other young people understand the importance of financial responsibility even at a young age. If we start our adult lives knowing about financial responsibility, we can make it further in our lives before we suffer from the devastation of financial mistakes that can take years and years to pay back. Hopefully, what you learn here will help you avoid those financial mistakes and maybe help you recover from the ones you've already made.