Net Revenue

Revenue (sales) shown on the income statement is revenue less any returns, discounts, or allowances for damaged or missing goods. In addition, the revenue on the income statement subtracts freight costs if this cost was added to the customer invoice. In the end, net revenue is reported on the income statement. 

Although gross sales make a company appear profitable, it is not reasonable to expect that a company will retain all of its sales revenue. It is not uncommon for goods to be returned or that services rendered are not satisfactory in these cases, customers receive refunds or credit. Inevitably, the company will give some of its sales revenue 

Companies have different approaches to recognizing sales revenue, incentives, and discounts. For example, the Target Corporation explains how they recognize sales revenue  

PepsiCo explains how they recognize sales incentives and discounts  

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The point at which the cumulative cash flow turns positive indicates the payout time (or payback time). This is the length of time required to receive accumulated net revenues equal to the investment. This indicator says nothing about the cash flow after the payback time and does not consider the total profitability of the investment opportunity. 

As a field matures, bottlenecks may appear in other areas, such as water treatment or gas compression processes, and become factors limiting oil or gas production. These issues can often be addressed both by surface and subsurface options, though the underlying justification remains the same the NPV of a debottlenecking exercise (net cost of action versus the increase in net revenue) must be positive. 

In the above equation, r can indicate the internal rate of return on an investment. Suppose that an investment in an energy-saving technology cost 100 and reduces energy costs by 20 per year indefinitely. The reduction in costs is comparable to net revenues received. The above equation can be modified as follows I equals R/r, where the values of I and R are specified and the value of r is computed. Hence 100 equals 20/r, and r equals 0.20, or 20 percent. The internal rate of return on the 100 investment is 20 percent per year. An investment is generally profitable when its internal rate of return exceeds the (interest rate) cost of obtaining credit. The investment is attractive when its internal rate of return exceeds the investor s hurdle rate, which may vary depending on the riskiness of the investment, and on the rate that can be earned from alternative uses of the investment funds. 

Stainless steel scrap Machining and cutting of pipe Sold to scrap recycler 700,000 —164,300 (net revenue received)... 

Product Net Price, /tonne Fraction of Refuse Recovered Net Revenue, /tonne Refuse... 

Simple breakeven analysis turns on building a simple linear model relating various costs and price. Say we get a price P per unit of product for which we pay a fixed cost F and a variable cost V. If we sell n units of the product, we may calculate the net revenue R received as follows ... 

Breakeven occurs at that volume rib where net revenue / = 0. This results in a relationship between breakeven volume, fixed cost, and contribution margin as follows ... 

Figure 11.2 Breakeven analysis is illustrated by a plot of revenue versus volume. At zero volume, the fixed costs are fully charged. At breakeven, net revenue is zero, and above breakeven, the margin accumulates straight to the bottom hne.

In words, the net revenue can be calculated as the excess volume over breakeven times the unit contribution margin. 

In all these calculations, the key quantity is, not so much the price or the variable cost itself, but rather their difference, the contribution margins. All efforts to widen margins result in a concomitant reduction in breakeven point and increase in net revenue. 

Graphically, the situation is illustrated in Figure 11.2, where net revenue is plotted as a function of volume. Of course, the mathematics here is nothing fancy, but the beauty of breakeven analysis is in the distinction it makes between fixed costs and variable ones. By making that distinction, you can calculate roughly and quickly to better assess opportunities as they arise. 

Net revenues (3.3) are calculated by adjusting gross revenues for sales costs incurred in a country. These sales costs include costs for marketing, country management, etc. and are expressed in per cent of the sales price. 

Pre-tax profits from sales are calculated by subtracting all costs allocated to the selling country from net revenues. The costs of goods are calculated based on the transfer prices in equation (3.83). 

Predicting the impact of mycotoxins on net revenues for grain producers has been the subject of intense studies especially in Canada (Charmley et al., 1995) where scientists have devised a prediction formula ... 

The difference between compensation and reimbursement is one of the first concepts that require further explanation. One of the goals of value-added services is to receive compensation for services. This means that the patient, insurance company, or some other entity has paid for the direct cost of the service plus the perceived value of that service. Reimbursement, on the other hand, is payment for only the direct cost of the service without any payment above that (Hogue, 2002). In order to have a profitable service, compensation should be targeted instead of reimbursement. If only reimbursement is targeted, then only the direct costs of providing the service, such as payment for supplies, is recovered, and the net revenue may be minimal. 

Raisin growers receive a lower price for raisins sold from the reserve pool than from the free market, in part because storing raisins in reserve generates a storage cost. The monthly allocation of raisins from reserves is determined by the Raisin Advisory Committee. When it is possible to sell raisins for use in ethanol production, the committee might increase its net revenue by selling a portion of the reserve pool in that market. The net returns obtained from selling raisins in both the food and ethanol markets can be described as follows ... 

The Raisin Advisory Committee can maximize net revenue by storing raisins for the food market only while net price in the food market (PF-cih) is greater than the price in the ethanol market (PE). The net price in the food market declines as the number of months in storage increases. We use in to represent the month in which the net price in the food market becomes equal to the price in the ethanol market (i.e., P, - cm = PE). The empirical value of in is determined by the relationship of the fixed parameters PF, PE, and c. In particular,... 

Based on the net revenue maximizing strategy, we conclude that between 1992 and 2001, the raisin industry would have benefited from an ethanol industry in 6 out of 10 yr. The additional net revenue in the beneficial years ranges from 0,689 million dollars in 1992 to 6,686 million in 2000 (Table 5). Preliminary market information from the 2002 harvest suggests that similar benefits might have been generated in that year. 

For any project, the repayment of the loan must effectively come out of its proceeds over the years, i.e. the total net revenues (cash flow) must be at least as large as the amount borrowed, on top of the other costs of construction, etc. However, the repayment element of the loan is not included in a financial appraisal, because its equivalent in plant cost has already been included in the balance as part of that cost. (An alternative way of looking at this is that the company, in paying back the loan, is just replacing that part of the original cost with an equal but differently sourced sum of money.)... 

In order to select the electricity production that maximizes the profit returned from its sale, the market price of electricity, MPE, must be known. The net revenue generated by the sale of... 

For a particular hot water requirement the optimal work output will correspond to the point where net revenue generated is a maximum. Figures 9-11 illustrate net revenue curves as a function of the work/heat ratio for a required hot water temperature of 250°F and for various market conditions. 

Figure 9. Net revenue generated as a function of work/ heat ratio for various market prices of electricity a hot water supply temperature of 250°F> and a fuel cost of 2 per million Btu.

Of course, the above calculations are hypothetical, but they do indicate that the 2.5 billion net revenue suggested by the Chase Manhattan figure is well within the range of accuracy. 

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