Introducing: Revenue
May 11, 2009, 10:23 pm
The incoming part of the Profitability equation.
Profitability is calculated by the formula: total revenue minus total expense. For this week, we will look at the first component of the profitability equation.
Generically, “revenue” may be defined as anything of value received for products, services or labor provided. Almost always, revenue follows expense.
In the simplest terms, revenue is cash received in payment for a product or service. In the market, there is a continuum of revenue, ranging from “Cash-Near Cash through to Barter of Products or Services.”
Recognizing revenue, and when to book it, requires understanding basic accounting and one’s business model. If a payment is not in cash, then it is important to track when whatever was received converts to cash (usually the “Near Cash” items, like checks, not the barter ones).
Revenue, by itself, is merely a quantity: it only tells you how much was received. It is silent as to the quality: it doesn’t tell you whether you are going to make money on the transaction and, if you are, how much. For that, you must how much you spent.
Nevertheless, revenue is on the positive side of the Profit and Loss (or Income) Statement, it is definitely something you need and revenue growth is almost always good.
Fortune 500 (s)
Fortune magazine keeps lists of companies based on many things, including revenue; grouped by any number of characteristics. Here are the top 5 companies headquartered in the Bay Area:
|
# |
Company |
Revenue |
|
1 |
Chevron | 210,783 |
|
2 |
Hewlett-Packard | 104,286 |
|
3 |
McKesson | 93,574 |
|
4 |
Wells Fargo | 53,593 |
|
5 |
Safeway | 42,286 |
Top 5 US Companies in Bay Area: ranked by Revenue; % of Revenue generated by group of 5. Source: Fortune 500, 2008; millions
Revenue is organizational food
Revenue is critical to the survival of any commercial effort–whether that endeavor is for profit or not-for-profit. Revenue allows expenses to be covered, resources to be obtained and bills to be paid.
Without revenue, any effort or organization will eventually disappear. Like any form of life, without food, it cannot survive. Organizations must have revenue. However, just as the caloric value of foods differ, not every dollar of revenue is created equal. To understand the value of different revenue streams, one must also know the costs involved with generating each “dollar of revenue.”
Bottom line: revenue is the only way an endeavor will be given the opportunity to stay alive. If revenue is of the right quality, the effort might even thrive.
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