Revenue and profit are two very different terms, but people often use them interchangeably, consciously, or unconsciously. As these are different concepts, using them interchangeably can lead to serious budgeting, financial, and accounting errors. Therefore, when you are working out your business’s finances, you need to understand the difference between these two.
In this article, we are taking a detailed look at revenue and profit. We will also discuss how can you calculate each of these terms and what makes these concepts important for your business. So, without further ado, let’s dive right in.
Revenue vs Profit: An Overview
Before explaining the differences, it’s essential to understand each term. Revenue is the net income generated after the sale of your goods or services. Profit, usually known as the bottom line, refers to the income that is left behind after you take out all the operating costs, expenses, and debts, etc.
Revenue is the top line. This is because it typically sits at the top of your company’s income statement. The revenue numbers show the income of a company before subtracting any expenses. For instance, consider a shoe seller. The revenue is the total amount it makes by selling shoes. Any additional income it makes from other types of investments does not fall under the term revenue as it doesn’t come from selling their primary product (i.e. shoes). Other income streams and expenses are separately accounted for in the finances.
Profit is the bottom line. It’s the net income on your income statement. People use variations of profit to analyze a company’s performance. The two most popular ones are gross profit and operating profit. These two profits are intermediate steps on the path to calculate the net profit. Gross profit refers to the revenue when the cost of goods sold is subtracted from it. On the other hand, operating profit is the gross profit when all other expenses (variable or fixed) are taken out from it.
What Is The Difference Between Revenue And Profit?
As you must have realized by now, both revenue and profit indicate your organization’s wellbeing and the overall health of your business. Therefore, it’s imperative to understand their differences.
Their primary difference comes down to this: Revenue is the income before expenses, and profit is the income after expense. If your business isn’t generating any revenue, there won’t be any profit. So profit is dependent on revenue, while revenue is independent of profit.
The basic formulae become:
Revenue = Sales Price x Quantity
Profit = Revenue – Expenses
In order to truly understand their differences, let’s dive a little deeper into each concept.
The Basics of Sales Revenue and Profit
People use the term sales revenue interchangeably with revenue to explain the total income of a business. It is then further broken down to illustrate the bills and receipts from the sale of goods and services (GSR or gross sales revenue), and minus any returns/allowances from the gross sales revenue. However, not all revenue comes from the sales of goods and services. There can be other sources of income such as any interest, etc. These other sources of income are then added as separate line items when calculating the total revenue.
Profit, as we already discussed, is the total revenue of a business minus any costs incurred. It’s the amount that remains after you have accounted for all the expenses, taxes, and other costs. While sales revenue considers just the revenue amount, profit considers revenue as well as expenses. It is then broken down further into operating profit and gross profit, as discussed in the section above.
Revenue is the sales or total turnover. It’s the income your business receives via its usual business activity. It can be from the sale of goods or services. Revenue is calculated before taking out any of the expenses. Hence, it’s the total amount of money your business receives in exchange for its services or goods. As we previously discussed, typically, when we say revenue, we mean sales revenue. But, revenue can also include other income streams such as interest-based earnings, rental income, or any other source of income. We count these income sources separately, though.
What is the formula for revenue?
Calculating revenue is as easy as pie. Simply use the formula below to calculate your revenue:
Revenue = Total Sales Cost x Quantity
For instance, if you own a shoe outlet and sell 150 pairs of shoes every month for $60 each, your revenue will therefore be $9000. It is listed at the top of a company’s income statement. Therefore it is referred to as the top line.
Profit is the financial gains of your business. It’s the difference between the revenue generated and money spent on purchasing, operating, and producing your product or service. While revenue is the income before you remove any expense, profit is left behind after removing the expenses. Your expenses can be anything, from the raw materials and inventory expenditures to government taxes and overheads. Profit is typically known as your company’s bottom line because it is usually listed at the bottom of the income statement.
What is the formula for profit?
The formula for profit is even simpler:
Profit: Revenue – Expenses
Consider the previous example of the shoe outlet in which you made $9000 a month in revenue. Imagine your shop rent, raw material cost, and salaries of employees cost around $5000. In this scenario, after subtracting all these expenses, your total profit would be $4000 only even though you sold $9000 worth of shoes.
Therefore, profit is always a subset of revenue. No revenue, no profit.
Different Types of Profit
We already discussed different types of profit earlier. Let’s take a little deeper look into these categories for better understanding.
Net Profit – Usually, when people mention profit, they mean net profit. It is the amount that remains after you have taken out all the expenses.
Gross Profit – Gross profit is often sidelined for net profit. Gross profit is the amount that remains after you have removed the cost of goods sold (only)
Operating Profit – Operating profit is the profit that remains with you after taking out the operating costs of your business from your gross profit.
Revenue vs Profit in Real Life
The shoe outlet was a relatively simple example. In the real world, we have to deal with different kinds of expenses. To make both of these concepts simpler for you, consider the below example.
Suppose you have an auto workshop. Now, there are different prices for different services you are offering, such as:
- Oil change: 50 USD
- Wheel Alignment: 100 USD
- Fine Tuning: 100 USD
- Glass Repairs: 120 USD
- Tire Replacement: 120 USD
For example, in January you sold 10 oil changes, 20 wheel alignments, 10 automotive fine tuning, 10 automotive glass repairs and 20 tire replacements. So, your January revenue can be calculated as follows:
$50 x 10 oil changes = $500
$100 x 20 wheel alignments = $2000
$100 x 10 tunings = $1000
$120 x 10 glass repairs = $1200
$120 x 20 tire replacements = $2400
Thus, your total revenue for the month of January, would be $500 + $2000 + $1000 + $1200 + $2400 = $7100
In order to find your net profit, you have to subtract this amount from all of your expenses. Your expenses can be material costs, employee salary, shop rent, electricity cost, etc. Say your total expenses are $4100. To calculate your net profit, remove this amount from your revenue.
$7100 – $4100 = $3000
Hence, your net profit for January turns out to be $3000
Why Sales Revenue and Profit Matter
Simply put, sales revenue and profit matter a huge deal for a business because they give valuable insights into the health of a company or business. When you know the profit of your business, you have an understanding of the value it generates with the cost of its services or goods. Likewise, revenue shows the quantity of a product or service demanded by the market at a particular cost. That is why when a company determines its profitability, both sales revenue and profit are at the top of its list.
Revenue vs Profit FAQs
Still, confused about what these two terms mean for your business?
Take a look at the Frequently Asked Questions (FAQs) below for more clarity.
Can Profit Be Higher than Revenue?
Not at all. Profit cannot be higher than revenue. This is because profit is calculated after removing all the liabilities and expenses from the revenue. And so far, there is no business that has zero expense. That is why revenue is always listed at the top of the business’s income statement. It is the top line. Profit is the bottom line because it is listed at the bottom.
Is Revenue the Same as Sales?
Both revenue and sales are often used interchangeably. However, there is a major difference between the two. Revenue is the total income a business or company makes before removing any liabilities. On the other hand, sales are merely what it earns by selling its goods and/or services to the consumers. If a company has multiple sources of income, its revenue will always be greater than sales.
What Is More Important, Profit or Revenue?
Sure, both profit and revenue have significance for a business, but profit is a little more important. It gives a much better picture of how a business is doing in the market. This is because when profit is calculated, it takes into account all the liabilities such as employee salaries, rents, and any other expenses.
How Much of Revenue Is Profit?
Profit is a subset of revenue. What remains after a business has taken all the operating costs – such as expenses, salaries, debts – into consideration is profit. How much revenue is profit depends on how profitable your business has been. If it is more profitable, a large chunk of your revenue will consist of the profit. And if the case is the opposite, the profit amount will be low in the revenue numbers.
Both revenue and profit are important terms listed on the income statement of a business. Revenue is the total income a business is making without taking any of the expenses into account. However, when you determine the profit of a business, you have to minus all the expenses. That is why revenue is top line and appears on top of the income statement. On the other hand, profit is the bottom line and therefore appears at the bottom of the statement. We hope now you have a much better understanding of what is revenue vs profit.
That’s all for now. Did we miss anything? Do let us know in the usual place.