Net revenue is gross revenue after adjusted for deductions. When selling a product, your company records it as gross revenue. To get it, you need to reduce it by factors such as:
- Discounts, i.e., the value or percentage of the deduction on the selling price.
- Purchase allowances, i.e., reduction in prices for reasons such as late delivery or quality problems.
- Sales returns, i.e., returned items that customers previously bought from your company.
When your company provides discounts or allowances to customers, it appears on the income statement to deduce gross revenue. You can find both just below the gross revenue figure.
Net revenue does not take into account the cost of goods sold and general and administrative expenses (both included as operational expenses). Its reporting is to show the actual value of the revenue your company is collecting.
Why does it matter
Net revenue is vital to know how effective your sales are. Purchase allowances and returns are a cost to your company. When both are less, it means more revenue you get.
Your company might also offer discounts to stimulate purchases. Net revenue figures help you understand what discounts are effective in increasing sales. You can compare gross and net revenue to see if you need to make adjustments to the discounts you offer.
How to calculate net revenue
You can use the formula below to calculate it:
Net revenue = Gross revenue – Deduction factors (discounts, sales allowances, etc.)
Let’s take a simple example. For example, suppose your company sells 1,000 units of products at Rp10 per unit. Your company offers a discount of Rp1 per unit if customers buy 100 units at a time. And, in that year, two customers bought 100 units at a time.
To calculate gross revenue, you must multiply the units sold by the selling price of the product.
Gross revenue = Rp10 x 1,000 units = Rp10,0000
Then, you need to find the total discounted price that you provided. Because two customers buy 100 units at a time, both get a discount of Rp1 per unit. Discounts = Rp1 x 200 units = Rp200
After deducting the discount, your net revenue is IDR 9,800 (IDR 10,000 – IDR 200).
