Revenue vs Profit
Business owners tend to use the terms “revenue” and “profit” interchangeably, but there is a big difference between the two. And to understand your company’s finances, cash flow, and potential tax consequences, it’s essential to differentiate between the two.
So, let’s look at the differences between revenue vs. profit, how to calculate each, and why it matters.
Revenue vs. profit: What’s the Difference?
Revenue and profit are both critical factors for understanding your business’s financial position.
The key difference between revenue and profit is expenses. Revenue is income before expenses, while profit is income after expenses.
Let’s look at each of these metrics in more detail.
What is Revenue?
Revenue is your company’s total income generated from sales of goods and services before taking expenses into account. It’s sometimes called “the top line,” as it appears at the top of your Profit & Loss (P&L) Statement.
This figure only includes income from your regular business operations. In other words, if you earn interest from your business bank account or sell a piece of equipment for a profit, those forms of income aren’t considered revenue — they’re typically classified as “Other Income” on your Profit & Loss Statement.
Your business’s financial statements may have two revenue amounts: gross revenue and net revenue. Gross revenue, sometimes called “total revenue” or “total sales,” is how much money the company makes before anything is taken out. Net revenue is how much is left over after deducting sales discounts, allowances, and returns.
Your company’s revenue is essential because it’s the primary driver of profitability — if you don’t have revenue, you can’t pay expenses or turn a profit.
What is Profit?
Profit is how much revenue your company keeps after paying all expenses.
Your business’s financial statements may have two profit amounts: gross profit and net profit. Gross profit is net revenues minus the cost of goods sold but before operating expenses. Net profit is what’s left over after deducting all expenses.
Net profit is also known as “net income” or “the bottom line” because it appears at the bottom of your Profit & Loss Statement. If the value that remains after all expenses have been subtracted from revenues is positive, you have a profit. If the value is negative, you have a loss.
Knowing your net profit is crucial because it tells you how much money you have left over to save for a rainy day, reinvest into the business, or pay yourself.
Why Revenue and Profit are Both Important
Revenue and profit are both important numbers to keep track of in your business.
If you pay attention to revenue but ignore profit, you could see steady growth in sales but wind up with little or no profit because your operating costs are out of control. On the other hand, if you focus only on profits, you may spend too much time and effort controlling costs and miss out on opportunities for growing your revenues.
A well-run business will have both high revenues (success selling its products and services) and healthy profits (ability to keep costs low).
The easiest way to keep track of both on an ongoing basis is with small business accounting software like QuickBooks Online. When you use accounting software, you can record all revenues and expenses and run a Profit & Loss Report to see where you stand at any point in time.
If you run your numbers and don’t like the results, there are generally three ways to improve your revenue and profit:
- Setting goals to generate more sales of your products or services
- Increasing prices to generate more revenue from the same level of sales
- Looking for opportunities to lower your cost of goods sold or operating expenses
If you need help calculating your revenue or profit or figuring out how to improve both, schedule a call with me! I can help you run the numbers and make better decisions about pricing your products and services and controlling your costs.
