In the first line of any income statement or profit and loss statement, it deals with revenues. The exact wording may vary, but you can look for terms like “total revenue,” “gross sales,” or “total sales.” This figure is the amount of money the company generated during the time period covered by the income statement.
Revenue vs. Profit
While terms like “revenue” and “sales” affect the company’s profits, the correlation is less direct than new investors might expect. Revenue will translate into profit only if there are costs associated with running the business. In the real world, there are costs to consider, including everything from salaries and rent to production and shipping costs.
Example Case Study
Let’s take a look at a simple hypothetical example. If you own a pizza restaurant and sell 10 pizzas for $10 each, you will record $100 in revenue. This figure is straightforward, regardless of profit or loss. However, there is more to the picture. The cost of flour, yeast, and other ingredients to make each pizza is $1, the cost of operating the oven is $1 per pizza, and the cost of paying the chef for their time and effort in making the pizzas is $1. So, while you generated $100 in revenue from 10 pizzas, you must deduct $3 in costs to determine the profit. The ten pizzas sold generated $100 in revenue but only $70 in profit.
The Problem with Focusing on Growth Alone
From the perspective of the owner or shareholder, an increase in sales may seem like a good thing, and while this is mostly true, there are downsides to this approach. There are some ways in which growth in sales can be misleading. For instance, if the growth is financed by diluting existing shareholders, taking on excessive debt, or engaging in risky activities, profits may be entirely wiped out by the time they reach the bottom line. Growth in sales or revenue should not be the goal in and of itself. The goal is to achieve profitable growth in sales and revenue, while considering the risks involved.
Real-World Case Study: Starbucks
Many companies break down revenue or sales into categories to clearly display how much each generates. For example, Starbucks’ profit and loss statements (P&Ls) provide the key figures in a comprehensive and consolidated table. The tables that appear later in the document break these figures down by specific factors, such as region or model.
When revenue sources are clearly defined and cataloged in separate tables, reading the income statement becomes much easier. We can say it is more “user-friendly” for both investors and the general public. It allows people to better anticipate future growth.
You can also find Starbucks’ sales figures (or any other company’s) in its annual report or its 10-K filing.
In the consolidated table, you will see that revenue is generally split into three main categories: company-operated stores, licensed stores, and others. Company-operated stores are standard Starbucks retail locations. An example of a licensed store is a Starbucks located inside another business, like a Starbucks kiosk inside a supermarket.
To use the most recent data, the figures here come from Starbucks’ reclassification in Q4 2019 and restated earnings data. For comparison, there are also figures from Starbucks’ annual report for the fiscal year 2017. The numbers are given “in millions,” meaning you need to multiply the figure by one million to get the actual revenue figure.
You can easily replace these figures with more recent data as new releases become available. You can also try filling out a similar table for an entirely different company to practice finding information.
Source:
https://www.thebalancemoney.com/total-revenue-or-total-sales-357593
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