Financial metrics must be understood when evaluating a business, particularly for funding or investment purposes. Gross revenue is all about how the company is making sales, whereas net revenue is about what the business keeps as money after expenses.
If you are a business owner looking to get a fund, either through equity or revenue-based Business loans, it would be amazing to know which one is more important to investor eyes so that you can decide whether to align your financials with gross revenue vs net revenue.
In this article, we will be exploring, addressing how they are computed, why investors care about both, and how you can put them to good use.
What Is Gross Revenue?
Gross revenue (also called gross sales or total revenue) refers to the earnings of a business before it pays for any kind of costs or anything that the company is required to pay for the products or services sold.
For example, a business would have gross revenue of $200, 000 if it sold 10, 000 units at $20 each. This does not take into account the costs of production, marketing, refunds, discounts, etc.
Gross revenue, however, is what lenders and investors often use as a bench test for determining sales performances and the scalability of the business. When gross revenue is high, it means, preferably, a strong presence of demand in the market for that product.
What Is Net Revenue?
Net revenue is what remains after subtracting sales-related expenses from returns, discounts, or allowances from gross revenue. The net revenue gives a fairer view of business income.
If, using our previous example, for some reason or the other, some $20, 000 was given as discounts or refunds, in this scenario, the net revenue would be $180, 000. This is a measure that shows operational efficiency because it is the money a company keeps from its sales.
To comprehend gross revenue vs net revenue is, thus, essential; using either one alone may portray an incomplete financial situation. Gross revenue, after all, shows potential, whereas net revenue shows reality.
Why Do Investors Look at Both Metrics?
So, which metric do investors care about?
The answer is not straightforward. Often, investors look at both gross revenue vs net revenue to gather a holistic view of a company's financial standing. The emphasis may change depending on the stage of investment and the business model in consideration.
Early-Stage Startups: Investors tend to look at gross revenue to gauge product-market fit and demand. High sales growth tells the investor that a startup is scalable, even though profitability is yet to set in.
Mature Businesses: For established companies, this slowly translates into net revenue, as they want to see how effectively the company manages its costs and how much profit it could retain, because these define long-term survival.
Lenders and Revenue-Based Financing: When applying for revenue-based business loans, lenders typically consider net vs gross revenue. They want to be sure you can make enough margin to be able to repay. Very high gross revenue coupled with razor-thin net revenue would be a glaring red flag.
Gross Revenue for Market Evaluation
One of the reasons investors care about gross revenue vs net revenue is that gross revenue plays a role in determining the market size and in business performance assessment. If your business earns $5 million in gross revenue in one year, it shows a strong demand for your product or service. This metric can also be used by investors to benchmark your business against its competitors.
Gross revenue vs net revenue becomes important when comparing subscription-based or SaaS-model businesses, whereby customers' acquisition and top-line growth form critical early metrics.
Net Revenue for Profitability and Financial Planning
While gross revenue depicts one aspect of how well a product sells, net revenue focuses on profitability. That is precisely why net revenue becomes one of the important metrics for financial planning and cash flow management.
There is more scrutiny exerted by investors and lenders examining your financials for sustainability in the long run-or in considering a revenue-based financing when it comes to your net revenue figure. A company that is strong in net revenue stands to invest more in growth and to weather economic tides better while repaying its obligations, be it revenue-based business loans.
Gross revenue vs net revenue both hold important relevance for understanding the financial health of your business. While gross revenue acts as a gauge of how well your product or service is doing in the market, net revenue shows almost the real picture of what you earned.
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Conclusion
Investors may or may not value the metric, depending on the nature and stage of your business. Growth-stage businesses might put the lens on gross revenue being very strong, while the more established ones need to focus on net revenue performance.
Revenue-based business loans will also relate significantly to the gross vs net revenue concept. Lenders will not care if you make lots of questions for them, is how much of that money do you keep?
In essence, with gross and net revenue, you could strategically put your business for investment, financing, and long-term growth.