Gross Revenue Vs. Gross Income

Revenue does not always translate into profitability.

Gross revenue and gross income are two critical figures for an analyst evaluating the health of company. While gross revenue indicates how much sales volume the firm generated, gross income tells the analyst how profitable these sales have been. The absolute levels as well as the relationship between these numbers paint a detailed picture of the financial health of the firm.

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Gross Revenue

The firm's gross revenue is the total amount of money the firm takes in from sales. This may not exactly equal all the money that the firm collects during the year as "extraordinary items" on the income statement may also result in additional cash. These include sources of income that are unrelated to the firm's usual operations, such as money paid to the company as a result of a legal settlement or a government grant.

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Gross Income

Gross income is the firm's before-tax net profit. To arrive at gross income, two items must be deducted from gross revenue. Returned merchandise must be deducted to find net revenue, after which the cost of the goods sold must be accounted for to arrive at gross income. The cost of goods sold includes only the direct costs involved in manufacturing the item sold or rendering the service delivered. A cheese manufacturer's cost of goods would include such things as the cost of milk, the salaries of the workers involved in manufacturing, the cost of packaging material, electricity and so on. Advertising costs or the salaries of the personnel not involved in manufacturing are not included in the cost of goods and such costs will not influence the gross profit of the firm.

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High Revenues

When both the gross revenue and gross income of the firm are satisfactory, there is little to criticize. However, If the revenues are high while gross profit fails to meet expectations, the firm should probably focus on either cost-cutting efforts or increasing its sales price. Such a combination means that the firm is selling enough but not turning a sufficient profit on each item sold. The reason might be high manufacturing costs or excessive price cuts to lure customers. Young companies tend to have high revenues but relatively low income as they engage in aggressive price cuts and promotional campaigns until they gain a foothold in the market thus resulting in lower profitability. Such a situation is therefore less of a concern in a newly established firm than an established institution.

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High Profits

If gross revenues are unsatisfactory but profits meet expectations, the firm may do well reducing its prices. Such practices often indicate an inflexible pricing policy in which the company insists on premium pricing and loses sales volume as a result. More frequent promotional campaigns and volume discounts may be considered as a remedy. On the other hand, certain firms refrain from such promotions or price cuts to retain a prestigious, luxury image and do well over the long term. Not every player intends to be a high-volume seller.

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