Small business owners often use sales and revenue interchangeably to measure financial success. While both terms seem synonymous with each other, below are the key differences that every business owner needs to know. 

Both sales and revenue are related, but not the same. Small business owners must understand the differences between the two concepts to optimize their financial strategies and make informed decisions. 

Our comprehensive blog on sales vs revenue breaks down the crucial differences and explains each one’s impact on financial statements and why differentiating them is essential for business survival and growth.

What Are Sales?

Sales are the consolidated sum of money that a business makes from selling its goods or services. It’s the primary activity of every business. Imagine if you sold 1,000 units of a product at $50 per unit; your sales would be $50,000. 

Sales can be divided into two types: gross sales and net sales.

• Gross sales are the total revenue from the sales before deducting discounts or returns.
• Net sales, on the other hand, are the exact amount of income from sales after factoring in returns, allowances, and discounts.

What Is Revenue?

Revenue is the total income of a business from its entire list of operations. Sales are part of revenue, which may also include other income streams like interest earnings, royalties, investment income, etc.

Revenue is of two types: operating revenue and non-operative revenue.

• Operating revenue is the amount of money that comes from the core business operations, like selling goods or services.
• Non-operating revenue is the income generated from sources different from the core business activities. Profits from the sale of assets, dividends, and interest income are some examples of non-operating revenue.

Also read: 10 Marketing Strategies Rooted in Human Psychology

Sales vs Revenue: Key Differences

1. Scope

Sales are the income generated from the primary business activities like selling goods or services, while revenue is a broader concept that includes income from other sources like investments and royalties.

2. Inclusion of Non-Operating Income

Sales only include income from the business’ main operations, while revenue can also be generated through non-operating income. To understand it better, imagine you have sold some of your old office furniture. This will be your business’ non-operating income, and thus, you must count it as revenue and not as sales.

3. Deductions and Adjustments

Factors like returns, discounts, and allowances affect sales. Net sales are what you are left with after all necessary deductions. Revenue, on the other hand, comes from your sales and non-sales income sources. Businesses with sold investments or secondary sources of income usually generate higher revenue even when their sales fall.

Also read: Psychological Secrets to Optimize Your Sales Funnel

Why to Know the Difference Between Sales and Revenue

The difference between sales and revenue helps both business owners and investors to analyze the financial health of a business. Below are some other key reasons why you must know the difference between sales and revenue:

1. Better Financial Analysis

Financial analysis of a business helps measure its profitability in the long run. A business with high sales might not always be making high profits. Factors like investments, expenses, and non-operating income influence the overall revenue of a business. 

On the other hand, non-operating income like the sale of assets shows significant revenue growth. However, if the sales are declining, it’s a sign of disaster for long-term viability.

2. Investor Insights

Investors look at financial data based on sales and revenue to know how well a business is doing. The difference between the two concepts helps them make an informed decision.

While a high total revenue might be impressive from afar, income from sales promises a better financial future. Occasional non-operating income events like selling assets or a division of the business might increase total revenue, but that’s not ideal. A business’ core operations might not be in good health. 

Therefore, investors take support of databases on sales and revenue separately to understand the operational strength of a business.

3. Strategic Business Decisions

Similarly, decision-makers or leaders from within the business organization make key decisions with the help of data based on sales and revenue. While sales is the most essential activity of a business, you must take advantage of strategic opportunities to generate other income streams.

Licensing deals and investments are some examples of strategic opportunities that pave the way for additional revenue. Also, if you rely on non-operating revenue, your business might deviate from the core sales growth. Both sales and revenue are crucial for long-term sustainability.

How Sales and Revenue Appear on Financial Statements

Sales and revenue are reported in the income statement of a business. It starts with gross sales, followed by adjustments for returns and discounts. An income statement helps the business calculate net sales. 

To calculate the total revenue, an income statement adds operating revenue to non-operating revenue.

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Key Metrics to Watch

• You must measure sales growth to evaluate the business’ performance in primary activities. If you see an increase in sales, gear up to meet the rising demand for your products or services.
• Measuring revenue growth, on the other hand, helps a business calculate its total earnings. Revenue growth gives a more holistic view of the financial health of a business when compared to sales growth.

Common Misconceptions About Sales and Revenue

As sales and revenue are used interchangeably by small business owners, it gives birth to many misconceptions. It makes analyzing a business’ performance tougher. Here below are some common misconceptions and their clarifications.

• “High Revenue Means High Sales“: That’s not true. A significant rise in non-operating income will inflate total revenue, despite sales being flat or in decline.
• “Sales Growth is a Guarantee to Maximum Profit“: This also can’t be true in all cases. While sales growth is crucial for profit, your expenses must be under control. Otherwise, your business will struggle for profit despite rising sales.
• “Revenue is More Important Than Sales“: No! Both sales and revenue are equally important, as sales offer insights into the business’ core performance, while revenue is essential to evaluating overall financial health.

Sales and revenue are used separately for business analysis and financial reporting. Key players like business owners, investors, and market leaders use data from both sales and revenue to assess financial performance and make informed decisions.

To summarise, sales are a subset of revenue, which offers a broader financial picture. Understanding the difference is essential for business owners to track financial growth and for investors to capitalize on the next big opportunity. We hope the nuances of sales vs revenue explained in our blog help you make informed decisions.