Net revenue is defined as a company’s sales (revenue) minus discounts and returns. Net revenue is sometimes called the ‘real top line’ because it reflects total sales with only direct sales-related expenses deducted.
Profit, also called “the bottom line”, is what’s leftover after all expenses – including discounts, returns, cost of goods sold, salaries, wages, and overhead and any other expenses – are accounted for in the income statement.
Are Net Sales the Same as Revenue?
Yes, the terms net sales and net revenue mean the same thing. Both refer to the total amount of sales of a company minus discounts and returns.
The Net Revenue Formula
The net revenue formula is simple:
Net Income vs. Net Revenue
Income statements flow in a logical sequence. They begin with the total amount of money coming into a company, reflected in gross and net revenue at the top of the statement. At the bottom of the statement is the net income--what’s left over after all expenses are deducted.
Net income is always found at the bottom of the balance sheet to show “what is left over” after bills are paid. It is what’s remaining after the cost of goods sold (COGS), SG&A (selling, general, and administrative expenses), depreciation and amortization, and any other expenses are deducted from the company’s net revenue.
Gross Revenue vs Net Revenue
Gross revenue and net revenue differ in that net revenue accounts for any discounts, commissions, or returns. Gross revenue does not.
Assume Shop XYZ sells 100 dresses at $50 each on Wednesday. The shop reports gross sales of $5,000 for dresses on that day. If one customer returns a dress, that return must be accounted for in the net revenue (-$50). Their actual net revenue on Wednesday would be $4,950.
If Shop XYZ issues a coupon for 10% off on Wednesday only, it would also need to deduct the amount of the discount from gross revenues. Their gross revenue vs. net revenue would look like this:
Wednesday only: 10% off
Dresses: $50 each (Price)
Quantity sold: 100 (units)
Gross Sales = units x price
Gross Sales = 100 x $50
Gross Sales: $5,000
Net Sales = Gross sales - returns - discounts - commissions
Returns: 1 x $50 = $50
Discounts: $50 x 0.10 = $5
Total Discounts = $5 x 99 units
Total Discounts: $495
Net Sales = $5,000 - $50 - $495
Net Sales = $4,455
Net Revenue Example
Hollywood Glamour is a direct sales company selling makeup kits by mail. In 20X9, the company sold 1,000 of its $100 complete makeup kits through a direct mail catalog and television infomercial. Out of the 1,000 kits sold, 50 were returned. The company also offered a special discount through the infomercial if callers mentioned a special code. Out of the 1,000 people who ordered from either the catalog or the infomercial, 89 mentioned the code and received a $10 discount.
The company’s net revenue looked like this:
Why Does Net Revenue Matter?
Many companies, especially retailers, use net revenue as their reporting base to account for returns and discounts early on in the income statement. By doing so, they make their actual revenues clear for potential investors.
Net revenue also matters because companies which pay commissions and fees must account for these before overhead and profits (SG&A) are accounted for in the income statement. If they don’t, they can misclassify commissions as indirect expenses.
Ask the Expert
Q: Can Net Revenue Be Negative?
Theoretically, yes, but it would be rare. Since net revenue is the gross revenue minus commissions, returns, and discounts, it is possible that a company could pay a higher commission and discount than the sales price of the item. To do so, however, wouldn’t make much sense, as the company would continually lose money.
Q: What’s the Difference Between Net Revenue and Turnover?
Turnover refers to the number of times a company earns revenue by using the assets it has. Net revenue reflects the sales of goods during the normal course of business.
Q: Are EBITDA and Net Revenue the Same?
No, they are not the same thing. Net revenue reflects the cost of sales. The expenses deducted from net revenue are directly related to the sales of goods. EBITDA (earnings before interest, tax, depreciation and amortization) deducts the cost of overhead and operations from net revenue.
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