When looking at your small company's finances, knowing the difference between revenue and profit is critical. You must separate the two to effectively manage your company's finances and set an appropriate budget. It’s common for people to use the terms interchangeably, but revenue and profit are two separate elements. Mixing up these phrases can lead to some costly accounting and budgeting errors.
Let's look at the differences between profit and revenue, how to calculate them, and why they're important.
What is the Difference between Revenue and Profit?
Both profit and revenue are important for a company’s finances. It is essential to know the key difference between them as both play a major role in your business.
You see the term 'net income’ in your business's income statement. The word net income is a more professional term for 'profit,’ but most people refer to it as the 'bottom line.' Profit is a variable of the income statement used to assess a company's success.
There are also various profit margins between the top line, i.e., net income. The term profit, for example, may appear in the context of gross profit and operating profit. These are the stages that lead to a net profit.
Gross Profit is the direct costs linked to manufacturing the commodities sold in a business. This figure comprises the cost of materials used in the production of a company's products and direct labor expenses. Operating profit is gross profit minus all additional fixed and variable expenditures, such as rent, utilities, and payroll that come with running a firm
The revenue figure is the amount of money a firm makes before deducting any expenses.
For example, before deducting any expenditure, a beauty and cosmetics retailer's revenue is the money it makes from selling beauty products. If the firm has income through investments or a related company, it is not considered revenue. This is due to the fact that it is not derived from the selling of beauty products. The company tracks additional sources of revenue i.e. operating and non-operating revenue, and different types of costs, individually.
Revenue vs. Profit - Main Differences
- Revenue is the income before any expenditure
- Profit is the income after your company’s expenditure like taxes, debts, wages etc.
- Your company won't be able to make a profit unless it generates enough revenue.
- Revenue is referred to as the top line of the company
- Profit is considered to be the bottom line
When most individuals talk about a company's profit, they're talking about net income. After costs or net profit, this is what's leftover. It's important to remember that a corporation might earn income while still losing money.
Types of Revenue
- Operating Revenue
The money a company's principal business activity generates is Operating Revenue. For instance, a retailer's operating revenue comes from item sales, whereas a physician's operating revenue comes from the medical services they provide. It varies depending on the type of business or sector.
Separating operational revenue from total revenue is significant because it gives useful information about principal business activities, productivity, and profitability. Understanding and analyzing income streams can help you analyze a company's performance and functioning.
Non-operating revenue comes from activities that aren't part of a company's core operations. This form of revenue is uncommon and irregular. Interest income, profits from the sale of assets, lawsuit money, and earnings from various sources unrelated to operations are examples of non-operating income.
For example, a wellness clinic may define consultation fees as operational income. However, donations from donors are non-operating revenue because they are not expected or part of the clinic's normal operations.
Types of Profit
- Gross Profit
Gross profit reveals how well a firm manages its production expenses, such as labor and materials, to generate revenue from the sale of its goods and services.
Operating profit, also called earnings before interest and taxes (EBIT), is a company's profit before removing interest and taxes.
Investors use net profit to assess a company's total profitability, which shows how well the company is managing it.
Calculating Sales Revenue and Profit
Formula for Revenue
Let’s take a step-by-step method to calculate revenue and profit:
- Calculate your operational revenue first.
- Multiply the quantity of items or services sold by the selling price. For example, if you sell 300 pairs of shoes at $80 each, your operating revenue is $24,000 (300 x $80). This should be done for all of the items or services you've sold.
- Add up all of your operational income.
- After that, figure out your non-operating revenue.
- Simply total up all of your profits from non-business pursuits.
- Finally, combine your operational and non-operating revenue together.
- Operating revenue + non-operating revenue = total revenue.
Formula for Profit
Use the formula below to calculate your company’s overall profit:
- The simplest formula for Profit is
Total revenue – total expenses = Profit
- For a much detailed formula, you need to deduct the following elements from your revenue calculate above:
o Cost of Sold Goods: $5000
o Operating Expenses: $3000
o Other Expenses: $1000
o Interest: $600
o Taxes: $1200
- Formula: Profit = [(Revenue – Cost of Goods Sold – Operating Expenses – Other Expenses – Interest – Taxes)/Revenue] x 100
- [($24,000 – $5,000 – $3,000 – $1,000 – $600 – $1200) / $24,000] X 100
- [($24,000 – $10,000) / $24,000] X 100
- Your profit will be 0.58 or 58%
Where Can You Find Revenue and Profit on Your Income Statement?
A financial statement that details a firm’s income and expenses is an income statement. It also displays if a firm is profitable or losing money over a certain period. The income statement helps in understanding your company's financial health.
Revenue and profit are two highly essential metrics on a company's income statement. Revenue is the top line, and profits are the bottom line. While it’s crucial to consider both of these metrics when making investment decisions, investors should keep in mind that revenue is the amount of money a company produces before subtracting expenses.
Can You Generate Revenue Without Making a Profit?
While both revenue and profit relate to money that a firm earns, a company can produce revenue while still losing money. Although funding might help a firm stay afloat for a while, it is ultimately a liability instead of an asset.
Revenue appears at the top of the income statement because it is the starting point for all financial calculations. It is the money you receive from the sale of products or services, so you can't have profit without income.
Why Sales Revenue and Profit Matter
Revenue reveals the amount requested at a given price, while profit reflects how much value a company obtains through the product's price and cost. Profit and sales revenue are both taken into account when calculating a company's profitability.
Profit, while crucial, presents a more realistic view of a company's financial situation. This is because when a company calculates its profit, liabilities and other expenditures, such as wages, are already taken into consideration.
How Understanding the Difference Can Help you Grow Your Business
Revenue and profit are important to businesses and investors because they provide information about a company's overall financial health. You must collect your firm’s accounts and assess performance to expand your company.
Profit and revenue are both taken into account when calculating a company's profitability. Even the most seasoned business owner finds revenue vs. profit challenging and confusing. However, to maintain control over your company's accounts and money, it is very important to comprehend the difference between them.
If you are starting a small business or have already started one, make sure that you understand the difference between the two first. The confusion can result in a tough hassle, mixing up the important aspects in your accounts. This will not only result in wrong calculations, but eventually an irreparable loss. So, understanding the difference between the two will not only clear up confusion, but also give a comprehensive picture of your company’s financial health.
Know the Difference – Grow Your Business
Profit and sales are significant indicators that may reveal a lot about your small business's financial health. You may utilize these numbers to:
- Set your own prices for your goods and services
- Assist you in developing your project budget
To summarize, while there is a significant difference between revenue and profit, they are nonetheless closely tied. As a result, knowing your financial statements and the distinctions between revenue and profit is critical to effective accounting and planning.