Revenue is the Return a company receives from providing services or selling goods to its customers, A company’s revenue, which is reported on the first line of its income statement, is often described as a service or sales revenues.
Therefore, revenue is the amount earned from clients and customers before subtracting the company’s expenses.
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Revenues also referred to as the top line, are recorded when the company earns them by either shipping the product or completing a service.
As mentioned before, the majority of businesses extend credit to their customers, and therefore, when revenues are recorded, the accounts receivable total on the balance sheet is increased and cash exchanges hand only when the customer pays the bill.
When investors examine revenues, two of the most important characteristics they need to look for are revenues’ quality and dependability.
A company could show increasing revenues by extending generous credit terms to its clients, and instead of collecting the cash payments, they could record an increase in accounts receivable.
However, this type of revenue would not be dependable, and as a result, it would not be worth much.
The sources of revenues are key here and to determine them, investors usually have to do more research beyond simply reading the income statement.
P.S: Reading the full annual report is necessary but a phone call to one of the company’s customers can shine a light on how dependable a certain revenue stream can be.
Some businesses possess revenue streams that are more reliable than others. For example, cell phone or cable companies receive recurring monthly payments for their services.
Customers pay their bills monthly and if their credit cards are charged monthly, then it becomes automatic. This type of income is extremely reliable. Now, compare it to a hair salon catering to women.
As a discretionary expense, customers can easily delay or cancel hair appointments, switch to less expensive salons, or eliminate particular services, such as hair coloring.
A similar type of business is personal training. As another discretionary expense, customers can easily cancel or discontinue sessions.
- Revenues for a cell phone company are much more reliable than revenues for a hair salon or a personal trainer.
- Not all revenue streams are created equal.
How to calculate the revenue?
To calculate the revenue for a company during an accounting period (year, month, etc.) is to sum up the amounts earned (as opposed to the amounts of cash that were received). For example, if a new company sold $80,000 of goods in November but allows the customer to pay 30 days later, the company’s November sales are $80,000 (even though no cash was received in December).
Reporting revenues in the period in which they are earned is known as the accrual basis of accounting. So, a company’s revenue could occur before the cash is received after the cash is received, or at the time that the cash is received.