“How much did we make this year?”
It's a question that’s likely to come up more than a few times, with the answer being a crucial component of your business’s success.
Annual revenue is your total gross income for the year—a key metric for assessing success and financial health.
In this article, we take an in-depth look at annual revenue. We show you why it matters, how to calculate it, and some ideal numbers to aim for.
What Is Annual Revenue?
Annual revenue is the total income your company generates over the fiscal year. Think of it as the raw sum you earn from selling your services before you factor in various expenses, like cost of goods sold, operating expenses, and taxes (those come into play when calculating profitability).
Your annual revenue is a starting point for understanding your company’s performance, growth, and financial health.
Annual Revenue vs Gross Revenue vs Net Revenue: What’s The Difference?
Annual revenue can be either gross or net.
Gross annual revenue is all income from operations over 12 months, before expenses—your top line.
Net annual revenue is what’s left after deducting expenses, returns, and discounts from gross revenue—your bottom line.
Gross revenue and annual revenue can also be stand-alone terms that refer to other periods, such as monthly gross revenue or quarterly net revenue. The gross vs. net considerations remain the same regardless of the period you’re applying them to. Gross is before expenses, net is after expenses—that’s the key aspect to remember.
What are the types of annual business revenue?
Not all your revenue will come from the same place, and yet, you’ll need to account for it if you want to perform an accurate financial analysis. Here are the two main types of annual business revenue.
Operating revenue
Operating revenue is the total income you generate from core business activities. For example, if you're a SaaS company with a solution that analyzes market trends, your operating revenue entirely comes from selling subscriptions to businesses. In most cases, your operating revenue is the lifeblood of your business since it brings in the most cash.
Non-operating revenue
Non-operating revenue refers to the total income you make from activities outside your core business offerings. Say your SaaS company sells its old servers and IT equipment to other companies; the income you make from those sales is your non-operating revenue.
Why Does Annual Revenue Matter To Businesses?
Your annual revenue is a starting point, giving you the first look into your company’s financial health. Calculate it, and you can gain insight into:
- Market presence: Higher annual revenue than your competitors typically means you have a strong market presence. Your business is good at attracting customers and making sales.
- Growth: If your annual revenue gets higher each year, it means that your business is growing. That’s especially reassuring for your investors and stakeholders.
- Important business decisions: You can’t make sound financial decisions without knowing how much money you’re bringing in. Analyzing annual revenue helps identify where to invest, focus products, and build forecasts.
- Investor interest: A higher annual revenue tells investors that it’s safe to give your business money. Strong yearly revenue numbers can help you get better financing terms and higher valuation.
- Long-term performance: With your past annual revenues stacked up, you can assess what’s working and what strategic changes you need to influence growth and profitability.
- Taxes: Calculating your annual revenue requires tracking transactions in the form of receipts. These documents help you prepare your income tax in compliance with federal income tax obligations.
By calculating your annual revenue, you’re able to further analyze your company’s financial health with metrics like profit margin, customer acquisition cost, or customer lifetime value.
How To Calculate Annual Revenue: Net and Recurring
Calculating annual revenue starts with adding operating and non-operating revenue. Typically, however, most businesses focus on net annual revenue, showing actual sales income after adjustments. In SaaS, another key annual revenue calculation is annual recurring revenue—which calculates how much you earn from selling subscription services. Here’s how you can perform these more informative annual revenue calculations.
How To Calculate Net Annual Revenue
To calculate your annual net revenue, find the sum of your:
- Discounts: Such as promotional discounts to customers or any payment incentives
- Returns: The value of products returned by customers.
- Allowances: Including credits and price adjustments given to customers for reasons such as product defects or service issues.
Then, subtract the sum from your gross revenue. Keep in mind that this is your net annual revenue and not your profitability. Let’s say you’ve started that market trend analysis software from our previous example. Over the last year, you sold $200,000 worth of subscriptions. $200,000 is your (gross) annual revenue. Next, it’s time to factor in expenses: $5,000 in refunds, $10,000 in discounts, and $2,000 in allowances, totaling $17,000.
Finally, subtract $17,000 from $200,000, and you get a net annual revenue of $183,000.
How To Calculate Annual Recurring Revenue (ARR)
Annual recurring revenue (ARR) is key for SaaS businesses, showing predictable income from subscriptions. To calculate ARR, multiply your monthly recurring revenue (MRR) by 12. Let’s say your SaaS tool has three plans:
- Basic: $20 monthly with 450 customers
- Growth: $60 monthly with 220 customers
- Enterprise: $180 monthly with 40 customers
To get to your ARR, you’ll first need to calculate your MRR by multiplying each pricing plan by the total number of customers. Then, add them up. That gives us:
MRR = ($20 x 450) + ($60 x 220) + ($180 x 40) = $29,400. Finally, multiply MRR by 12 to get: ARR = $29400 x 12 = $35,2800.
What Is Good Annual Revenue for SMBs?
If you’ve followed along and calculated your SMB’s annual revenue, you’re likely curious to know if the numbers reflect good financial health. The short answer: it depends. Business size, industry, and location impact annual revenue, so compare yours to competitors. That being said, here is the average revenue of SMBs depending on employee number.
This is an average meaning you could be well below or well above these figures. For specific information on your industry, look for recent reports from trusted sources that share data from companies like yours. By comparing your income to the national average, you should be able to gauge if you’re in good financial health.
Get More Financial Insights with Cledara
Understanding your annual revenue is only one part of assessing your company’s overall financial success. With annual revenue, you’ll be set to calculate other important key performance indicators, like revenue growth rate and net profit margin. To learn more about the world of SMB finance, head over to the Cledara blog—where we cover key financial concepts for founders and CFOs. You’ll find everything you need to better understand your company’s current financial standing and improve it for the future. See you there.
