Revenue/Sales is income generated by the business from its core activity. It is also called the ‘top-line’ of the company. It is called the top line because it is the first line item in the profit & loss account .Net income is the bottom-line of the company, i.e. Sales/Revenue-cost (Expenses are deducted from revenue to reach Net income). It is the last line item of the profit&loss account, hence the name.
Mathematically it is represented as, Sales Revenue= Sales Price* Number of Units Sold
Case breakdown: Movie Big:
Josh (Played by Tom Hanks) sees the action figure, and he isn’t impressed by it,so he asks Paul what’s fun about playing with a building. Paul says the sale for action figure sale has increased from 27% to 45% in the last two years.
In organizations, sales revenue is ‘fun’ when it reports high percentage growth. While, Josh (Tom hanks) isn’t interested in numbers, he is interested in the product (action figure), which is a building that turns into a robot.
Many times, Revenue and Sales are used interchangeably in accounts & finance.
Types of Revenue:
Revenue could be of 2 types
- Operating Income– This income is derived from the business’s core activity. For example, Bank’s core activity is depositing and lending, hence it derives its income through interest. Therefore Net interest margin (interest on lending-interest on deposit) is the primary income for banks.
- Non-Operating Income– This income is any secondary income i.e. income that is not derived from the core activity of the business. Hence, any income small income such as gain on exchange of foreign exchange, interest income (not, in case of banks) etc form part of non-operating income.
To increase profit (net income/bottom line) of the company, companies try to cut costs or expenses and increase revenue. Net Income is Revenue-expenses. Generally, in market, people are interested in knowing what exactly is the top-line and bottom line of the company. This gives analysts a sense of expenses the company is incurring.
Understanding Revenue through a real life case:
Lets take a case of Hasbro Inc., one of the leading play and entertainment company. They are leading in gaming industry and action-figures such as Monopoly, Jenga, Transformers’ Unicorn etc.
Attached below is the revenue details for full year of 2019 of Hasbro Inc. As you can see total net revenue of the company in 2019 is $4,720,227. Operating Profit stands at $652,050, EBIT at $594,210 and Net Earnings or bottom line is $520,454.
Net revenue flows in the organization through different segments and geographies, below is a snapshot to understand, $4,720,227 is flowing from which geographies:
As one can decipher, from United States itself the sales are $2,653,337 and the balance is flowing from the international markets.
Revenues can also be divided according to the different brand portfolio, here is the snapshot to understand the same.
The above chart is expressed in million dollars. Franchise brands include transformers products, Partner brands include Disney (subsidiary is Marvel), Dreamworks etc. Hasbro Gaming products were partially offset by net revenue increases from DUNGEONS & DRAGONS products.
The Emerging Brands portfolio grew 5% in 2019 compared to 2018. Net revenues were positively impacted by the introduction of the Company’s POWER RANGERS products, as well as net revenue increases from PLAYSKOOL products