Within accounting, there are countless ways to slice and dice revenue and profit numbers. Each metric has its own value to business owners, profit often being chief among them. However, total revenue, or the total amount brought in before any expenses are considered, also serves an important purpose.
If you are looking for past total revenue numbers, you will find them atop the income statement. The income statement begins with an overview of all revenue streams over a certain period before subtracting cost of goods sold and operating expenses.
However, if you are looking to determine what your total revenue would be in the future, the income statement will be less helpful. Maybe you’re deciding whether to offer a discount on your products or services or whether to raise your prices. In either case, the total revenue formula will help you to make those decisions.
Total Revenue Formula
To calculate total revenue, use the following formula:
Total Revenue = Quantity Sold x Price
Take, for example, a leather craftsman who sells boots for $100 per pair. If he sells 50 pairs per month, his total revenue is $5,000 ($100 x 50 = $5,000).
This formula becomes especially useful if the craftsman is considering lowering his prices to $80 per pair in order to boost sales. If he sells the same amount each month, his total revenue would drop to $4,000 ($80 x 50 = $4,000).
Using this same formula, the craftsman can also determine how many more boots he would need to sell to make the total revenue amount before the discount by dividing his previous total revenue by his discounted price.
$5,000 (Total Revenue) = X (Quantity Sold) x $80 (Price)
Quantity Sold = $5,000 / $80
Quantity Sold = 62.5 boots
Therefore, our craftsman knows that he needs to sell at least 63 pairs of boots in order to match his total revenue before discounting. If he thinks that the discount will bring in far more orders than that, it might be a wise move for him. This decision relies on the business owner having a strong understanding of the market price for boots like the ones he makes, as well as the size of his target market.
Why Total Revenue is Important to Business Owners
What the previous example leaves out are the details of how the craftsman will fulfill the increased demand for his boots—if he decides to offer the discount. Will the cost of producing each boot go down with the increased volume? Will he need to hire another boot maker to help fulfill demand? Will it slow down production time?
There are many downstream factors to consider when pricing products or services. However, the total revenue formula gives business owners a place to start when considering their pricing.
Consider an independent consultant as another example. She charges an hourly rate of $200/hour for her consulting services. If she wants to limit the number of hours she works to 40 per week and assumes that she will need at least 10 hours per week for non-billable work, she knows that her maximum total revenue each week will be $6,000 (30 hours x $200/hour).
If the consultant looks at that number and thinks it is too low (either for her goals, her lifestyle, etc.), she knows off the bat that she needs to consider raising her prices or looking for additional revenue streams that are not dependent on billable time.
If, on the other hand, the total revenue number appears acceptable, she can begin to consider possible expenses, like the software she’ll need or her tax obligations. In this case, total revenue gives her a jumping off point to further explore her pricing options.