The two most crucial variables for gaining valuable insight into the financial health of your company are revenue and profit. These indicators assist you in managing your cash flow, comprehending your financial statements, and creating monthly, quarterly, and annual budgets. Moreover, revenue and profit are not interchangeable terms. So, what is the key difference between revenue vs. profit?
In the following blog, we will explore the concept of revenue and profit and how both are different from each other.
Revenue vs. Profit – Definition
Revenue
The money that a company makes from its primary business operations is known as revenue. In other terms, revenue is the money you make from selling items or providing services. It is the first line on the company income statement. Others also refer to it as sales or turnover. It excludes money that your firm makes from other sources, including rent on property owned by the company or interest on deposits. Simply put, revenue is all of the money that your company makes before deducting any other costs.
Profit
Profit is the money left over for a business after meeting all the costs. Profit is the difference between what is earned and what is used to purchase, operate, or produce an item. In other words, it’s the money a business makes. However, profit, as opposed to revenue, does include money made from things like rental or interest income.
They can range from taxes to inventory charges. The bottom line or net income is another name for it. Thus, profit is ultimately a component of your revenue.
Revenue vs. Profit – Types
There are various types of profits and revenues.
Types of Revenue
Operating revenues and non-operating revenues are the two main types of revenues that are available on an income statement.
Operating Income
A firm typically derives the majority of its income from its main business operations, which create operating revenue.
Examples of operating revenue include the following:
● Sales
● Rents
● Consulting services
Non-Operating Income
Non-operating revenue is obtained from activities not connected to your company’s core business operations, typically irregular or unknown transactions. Non-operating revenue examples include:
● Revenue from interest.
● Equipment or asset sales.
Types of Profit
Gross Profit
You can compute the gross profit by subtracting the cost of goods sold (COGS) from the revenue. COGS includes any direct expenses you incur to provide your goods or services.
Operating Profit
It is gross profit minus operating costs. Other costs like rent and utilities may be categorized as operating expenses. Thus, these are expenses that the company faces.
Net Profit
Net profit is the amount that remains after the payment of all other costs. It includes one-time fees, including taxes, legal settlements, and interest costs.
Read more ” Net Income: Definition, Uses, Formula, & How to Find it?“
How to Calculate?
Knowing the formulas makes calculating revenue vs. profit easy. But, because the profit formula depends on revenue, you will always need to figure out revenue first.
You can use the following formula to determine a company’s revenue:
Revenue = Product / Service Quantity x Selling Price
Example
For an instance, in a month, you sell different clothing accessories. It includes 20 pairs of trousers, 5 shirts, 10 T-shirts, 10 blazers, and 5 hoodies.
Revenue = Quantity x Sale Price
Trousers = 20 x $30 = $600.
Shirts = 5 x $15 = $75.
T-shirts = 10 x $10 = $100.
Blazers = 10 x $150 = $1500.
Hoodies = 5 x $20 = $100.
Total Revenue = $600 + $75 + $100 + $1500 + $100 = $2375.
Using the revenue as a starting point, you may then determine the profit (or net profit) by deducting all costs (COGS, operating expenditures, debts, and taxes) from the total revenue plus other income.
You would have to total up all of your outlays and deduct them from your income. Payroll, equipment expenditures, utility bills, taxes, and any other expense could fall under this category.
Profit = Revenue – Expenses
Example
So, let the monthly expenses be $475.
Hence,
Profit = $2375 – $475 = $1900.
Why Revenue and Profit are Important?
Because it appears first on an organization’s income statement, revenue is frequently referred to as the “top line”. A corporation sells more of its goods or services when it experiences top-line growth. To achieve maximum profit, all firms strive to grow revenue and decrease expenses. Profit is represented on the “bottom line” on an income statement. Investors or decision-makers frequently use the total profit to assess a company’s performance.
An organization is contracting or struggling if its revenues are declining year after year. In general, a corporation has more money to work with to reduce costs and turn a profit the more income it brings in. The ultimate objective of any new firm is to swiftly and effectively create income while maintaining the lowest possible cost of goods or services.
Revenue vs. Income vs. Profit
A layperson can confuse the terms revenue, profit, and income, although there is a significant distinction between them in business jargon. Revenue refers to the sum of the money the business makes from both operational and non-operating activities.
Contrarily, profit refers to the financial gain that results from subtracting the amount spent from the amount the company makes within a given accounting period.
One interprets income as the company’s total income after deducting all interest, costs, dividends, and liabilities.
Related Topics
Frequently Asked Questions
Is there a chance of profit exceeding revenue?
The top line, or revenue, appears at the top of a company’s income statement. The bottom line helps in describing profit, on the other hand. Due to the deduction of costs and liabilities, profit is less than revenue.
Are Sales and Revenue the Same?
Sales are a typical term for revenue. Yet, sales are the money a company makes through offering goods and services to clients, whereas revenue is whatever cash a corporation generates before the deduction of expenses.
Does a financial statement help in tracking profit and revenue?
In order to manage and forecast revenue, income, and profit, financial statements are crucial. Each makes use of the same kinds of financial statements, such as a profit and loss ledger or a general ledger (PNL).
Which is more important, revenue or profit?
Although both are critical, profit paints a clearer picture of a company’s financial situation. It is due to the fact that a company’s liabilities and other costs, such as payroll, are already taken into account when determining its profit.
