Small business owners often want to know what the difference is between “revenue” and “profit”.
Broadly speaking, revenue is the total amount of money a business makes from its sales or services in a given time period. Profit is different. Profit is the amount of money a business keeps from its revenue after subtracting its expenses.
Profit is what owners and shareholders pocket and what's used to pay off debt or put towards growth. But revenue also has its uses, which we'll see very soon.
So which one is better? And how do you calculate your revenue and profit? Read on for all those answers and more.
What is Revenue?
Revenue is all the money made from a company’s operations. It constitutes money generated from total sales, services rendered, interest earned, rents received…the whole enchilada.
If you use accrual accounting, you’ll include sales made on credit, or any services rendered that haven’t been paid for yet, as part of your revenue. Make sure to check your cash flow statement regularly to confirm you have enough cash on hand to stay afloat. If not, you may need to collect on what’s owed to you. Meanwhile, if you use cash accounting, a sale or service is considered revenue only once it’s been paid for.
You can find revenue at the top line of an income statement. Meanwhile, net profit is at the very bottom line (hence the phrase “bottom line”). Ultimately, you’ll see a profit if your revenue is greater than your expenses.
Why is it important to know your revenue? Revenue can help you:
- Spot trends: Helps you figure out if you’re selling more of your products on certain days, weeks or at specific times. That way, you can prepare to meet demand.
- Pay taxes: In some places, you have to pay taxes based on your sales revenue (called a gross receipts tax), so it’s helpful to know how much you’ll owe–so you can add that into your budget.
- Report to bankers and creditors: Revenue is the first line on the income statement, a financial statement used by external parties to gauge the financial health of your business.
- Find other important metrics: You’ll need revenue to figure out other metrics, like profit and profit margin.
Calculating Revenue
The actual calculation for how to compute a company’s revenue is simple. Take the sales price and multiply it by the amount sold, and that equals your revenue.
Say that you are a florist and sell bunches of roses for $25 each. Over the past month, you sold 100 bunches. Your monthly rose revenue would be:
Revenue = Quantity Sold x Price
= $25 x 100
= $2,500
That being said, if you’re a retailer that allows returns and offers discounts, you’ll want to use this formula to figure out what you're bringing in:
Net Revenue = (Quantity Sold x Unit Price) - Discounts - Allowances - Returns
What is Profit?
Profit is the amount left over after a business subtracts all costs and overhead from its revenue.
As a business owner, you can pocket those profits, give them to shareholders as dividends or reinvest them in the business.
That’s why investors are so interested in your profit. It can help them figure out if they’ll gain money by investing in your company. Even if profit is reinvested, that will bump up your business’s stock value–which could put more money in the pockets of owners and shareholders in the future.
There are three different types of profit, and each tells you something different about your business.
1. Gross Profit
Gross profit constitutes your total revenue minus the cost of goods sold (COGS). What are COGS? Glad you asked! COGS are the costs of producing or making the items you’re selling. That includes the cost of raw materials and labor but doesn’t include things like distributing or selling the goods.
Gross profit tells you how much money you have left to fund your business after actually making your product.
Gross Profit = Revenue - Costs of Goods Sold
2. Operating Profit
Operating profit is your sales minus all your expenses except interest and taxes. As the name suggests, operating profit helps you figure out how much you’re making from your business operations. In other words, are your core business activities yielding profits?
Operating profit is different from gross profit because it accounts for more expenses–like rent, mortgage, shipping, utilities and any amortization–essentially all your operating costs. Since operating profit doesn’t include taxes or interest, it can also be referred to as earnings before interest and taxes or EBIT.
Operating Profit = Revenue - (COGS + Operating Expenses + Depreciation + Amortization)
Net Profit
Net profit, a.k.a. net income, is how much you make once you deduct all expenses, *including* interest and taxes and overhead costs, from the revenue.
You’ll find this figure on the bottom line of your income statement, which is why it’s also called a company’s bottom line.
Net profit is essentially your company’s income. It tells you how profitable you are and how much you can pocket, give out as dividends or retain to pay off debt, start up a new project or put towards other things at your company.
Net profit = Revenue - (COGS + Operating Expenses + Amortization + Depreciation + Interest + Taxes)
What’s Better: Revenue or Profit?
The basic job of a business is to make a profit. Make your company a profit, no matter the revenue, and you stay in business. But make good revenue and no profit and you eventually go out of business. That is why investors look for companies that have healthy profits and profit margins. They are an indication that the business is being run efficiently and is poised for growth.
Back in the dot-com era, Pets.com made $100 million in revenue in a few months, but no profit. In fact, it lost money, even with all that revenue.
It went out of business in nine months.
More recently, WeWork went bust because, although revenues were great, it never could turn a profit.
In general, a lack of profit indicates that the company is saddled with too much overhead or debt and is not being run very efficiently. Conversely, a good profit and profit margin means that the business does not have excessive overhead, products are priced appropriately, and there is a market for what the business is doing. That profit can then be used to grow the business even more.
Profit, not revenue, you see, is the key.
Revenue vs. Profit FAQs
Is there a way to increase profit even if you make the same amount of revenue? Yes. Essentially, there are three ways to increase profit:
- Charge more for the same item.
- Sell more items.
- Cut overhead.
Of these three, you will notice that 1 and 2 require sales. Only number 3, cutting overhead, is a sure way to increase profit on the same sales. Either way, if you’re seeing decreases in your profit, it might make sense to try one of these strategies soon.
Is revenue the same as sales? Almost, but no. Revenue refers to the amount of money a company makes overall–and that includes sales. But it is possible sales are only one source of income for the business. There may be other sources of income and revenue beyond sales revenue, such as income from investments, rental income, etc.
Does revenue only come from a company’s core business? Not necessarily. Revenue is income derived from all sources of the business. If you had a flower shop, bouquets might be your core business, but you could also teach floral design on weekends. That, too, would be business revenue.
Can profit be higher than revenue? Your profit can’t be higher than your revenue. Why? Because to get your profit, you have to subtract your expenses from your revenue. Meanwhile, you don’t subtract your expenses when calculating revenue.
Why do the sharks on Shark Tank seem to be more interested in profit than revenue? Profit tells you how efficient a company is, as well as how much bloat it may or may not have. A small business with a lot of sales but little profit is not usually that valuable. One with a lot of profit, however, can put money in the pockets of shareholders and owners alike.
Keep Tabs on Both Metrics
Both profit and revenue are important metrics. Revenue tells you how much total money you’re bringing in–and can play an important role in spotting trends, paying taxes and financial reporting.
Profit is what’s left over after subtracting certain expenses from your revenue. Different profit measurements account for different expenses, with net profit being your company’s “bottom line.”
So now that you know everything there is to know about the difference between these two metrics–all that’s left to do? Get out there and start selling. And, even better, making more profit!
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