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Net Revenue vs. Gross Margin vs. Net Income: What’s the difference?
accounting

Net Revenue vs. Gross Margin vs. Net Income: What’s the difference?

You may get advice as a small business owner to measure your incoming revenue and profits based on several criteria, such as net revenue, gross margin, and net income. But what’s the difference, and which is the best measurement for understanding the financial health of your business? What does income vs revenue really mean? 

These measurements are helpful if you understand what each one means and what they tell you about how your business operates.

What Is Net Revenue?

Your net revenue meaning in accounting, or net sales, is the total income generated from your business operations minus any adjustments, such as accounting for returns, refunds, and discounts.

Say your company had a good month and sold 500 products at $100 per piece. Your revenue for the month would be $50,000. But what if customers returned 20 of those products? You subtract $2,000 ($20 x 100) from your total revenue to get a net revenue of $48,000. Now imagine you offer a price-matching deal to stay competitive with other businesses. Five customers come in with a competitor’s ad showing a price of $80, so you refund them $20 each.

Net revenue is revenue minus adjustments, so you also subtract the $100 ($20 x 5) to get net revenue of $47,900. It’s helpful to keep an eye on net revenue because it gives you a complete picture of how much money you’re taking in instead of revenue alone. Comparing net revenue against revenue in accounting is a true test of income vs revenue.

What Is Gross Margin?

Gross margin or gross revenue digs a little deeper into how much money you’ve earned by deducting the cost of goods sold (COGS), so you calculate it by taking total revenue and subtracting COGS. The COGS includes the materials, labour, and overheads you assign to the products you sell. If you’re making pricing and manufacturing decisions, gross profit is a useful metric, as it focuses only on what goes into the actual product.

What Is Net Income?

Your net income is your income after all eligible operating business expenses. Net income goes even further than gross income because you deduct all operating business expenses, including overheads and taxes.

The formula for net income is simply total revenue minus total operating business expenses.

People often refer to net income as “the bottom line,” as it is the last line item on an income statement. This figure indicates your business's net profit, and whether your business is profitable.

For example, company A has a sales revenue of $1 million and high expenses, so it has a net income of only $10,000. Your company has a sales revenue of $100,000 with low expenses, so you have a net income of $50,000. Concluding even though company A has higher revenue, your company’s more profitable.

If you have a small business, net income is your business income (the revenue for selling products or services) minus your deductible expenses. If you’re self-employed, your net income is your professional income (the money you make for providing professional services) minus your deductible expenses.

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Net Revenue vs. Gross Margin vs. Net Income

Your management department may decide whether to continue selling a product based on the gross margin of that product. Although net revenue and gross margin are useful internal figures, external parties care most about net income. Because net income incorporates all expenses, it’s the only figure that truly encompasses all business operations and helps provide an overall picture of business operating profit and financial health.

Net revenue and gross margin are beneficial internally, as they help you make business operating decisions. If there’s a significant difference between revenue and net revenue, you may want to look into what’s eating into your earnings.

Are your discounts too generous? Could a large number of returns indicate a production problem that is impacting product quality? Analysing net revenue can help you identify these opportunities for improvement.

Similarly, gross margin can help you make decisions about setting prices and managing costs. If you have a slim gross margin, you might consider seeking a cheaper Supplier, cutting costs by streamlining production, or raising prices to increase revenue.

Ultimately, all three figures are important to know because they reflect different positions of a company.

Net revenue only looks at the money you earn, gross margin only looks at product or service activity, and net income looks at everything.

These figures also help you measure your company’s financial health when you factor them into profitability ratios, which are measurement tools that give you further insight to aid your decision making.

Tracking these three figures gives you helpful information that helps you make the best possible decisions for your company. Using an accounting system, such as QuickBooks Online, you can automatically generate a Profit and Loss statement. Start a free 30-day trial today to learn how.  

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