If your business were a plant, then total revenue would be the water it needs to grow. Although it’s just one metric, it provides valuable insights into your selling strategy, pricing, and business growth.
The statement above may seem obvious, but understanding total revenue and how to record and analyze it is less straightforward.
Here, we’ll discuss total revenue basics, how to calculate it, and where it differs from marginal revenue.
Generally speaking, most of your revenue will come from sales. However, depending on your business, it could also include donations, lawsuit proceeds, and dividends from investments — although this is rare.
For example, a retail store generates most of its revenue through merchandise sales. However, it may also generate revenue from a secondary source, such as money awarded from litigation.
You can find total revenue on the top line of your income statement. It shows your business’s total revenue during a specific accounting period — this can be a month, quarter, or even a year. When a company has “top-line growth,” it’s seeing an uptick in sales or revenues.
The higher your total revenue, the more revenue your business is generating from its core operation and, ultimately, the more your business is growing. But if you see a decline in this number, it could be a signal to reevaluate your sales strategy, marketing efforts, or pricing model.
How to Calculate Total Revenue [Formula]
Whether you use cash or accrual accounting, the formula for calculating total revenue is the same:
Total Cost = Number of Units Sold x Cost Per Unit
For example, if you sell 3,000 units of your product in one month at $60 each, your total revenue is $180,000 for that accounting period.
But what if your sales are slow? Let’s pretend you drop the price of your product to $50 each, which would bring your total revenue to $150,000. To make up for the $30,000 in lost revenue, you have to increase your sales volume.
But how many products, exactly, do you need to sell? You can use the total revenue formula to find out:
$180,000 (Total Revenue) = X (Quantity Sold) x $50 (Price)
$180,000/$50 = 3,600
You would need to sell 3,600 units to hit the same revenue. As you can see, you can use this formula to forecast prices— along with the quantity of product you need to sell to meet your sales goals.
It’s important to note that if you sell multiple products or services, you need to calculate the total revenue for each product separately, then add them together.
For example, if you own a sporting goods store and sell tents and sleeping bags, you would calculate the total revenue for tents and the total for sleeping bags — and add them together.
Total Revenue and Marginal Revenue
While revenue is one number, there are many different ways to look at it. Let’s look at the relationship between total revenue and marginal revenue.
Total revenue is the amount of money a company brings in from selling its goods and services. In other words, company’s use this metric to determine how well they’re generating money from their core revenue-driving operations.
Marginal revenue directly links to total revenue. It measures the increase — or decrease — in revenue as a result of selling an additional product or service.
As long as the marginal revenue exceeds the cost of producing an additional unit, the total revenue will increase. But if the cost exceeds the marginal revenue, it makes sense to stop production.
To calculate marginal revenue, use the following formula:
Marginal revenue = Change in the Total Revenue / Change in the Quantity of Goods Sold
For example, suppose a bakery sells birthday cakes — and each cake costs the bakery $5 in materials to make. They sell the cakes for $15, meaning the profit for each cake is $10.
Now, suppose they receive a special order for a custom cake. It still costs $5 to make, but this time they sell it for $20. The profit for the cake is $15 — which is greater than the average profit for other cakes. This is an example of increasing marginal revenue.
There’s a reason why total revenue appears on the top line of an income statement. It’s a critical figure for business growth — and can inform your selling and marketing strategies and guide you when setting prices. But total revenue is just the starting point — to get an accurate financial picture, businesses should also consider how expenses and operating costs impact the equation.