It’s important to understand the difference between revenue vs. profit, especially when examining your small business’ finances. Consequently, to accurately manage your company’s finances and create a sufficient budget, you need to differentiate between the two.
While people often use these terms interchangeably, revenue and profit are two very different concepts. Therefore, using these terms interchangeably can lead to critical accounting and budgeting mistakes.
Let’s understand the difference between profit and revenue, how to calculate each one, and why these concepts are essential.
What Is the Difference Between Revenue and Profit?
Revenue and profit are both very strong indicators of your company’s financial wellbeing. Because you’ll use both, it is crucial to understand their differences to accurately assess your business’ finances.
The key difference to understand both these terms is the expenses.
When looking at revenue vs profit, the main difference is that revenue is income before expenses and profit is income after expenses. Without generating sufficient revenue, your business can’t make a profit.
To better understand the main differences between revenue vs. profit, let’s compare the two concepts head-to-head.
|Definition||Revenue is your business’ income before expenses.||Profit is your business’ remaining income after expenses.|
|Formula||Quantity x Sale Price = Revenue||Revenue – Expenses = Profit|
|Types||Operating Revenue, Non-Operating Revenue||Gross Profit, Operating Profit, Net Profit|
|Relationship||You can generate revenue without profit.||You cannot generate profit without first generating sufficient revenue.|
|Where to find||Revenue is found at the top of the income statement.||Net profit is generally the last line on the income statement.|
But to truly understand the differences, let’s take a look at each concept separately.
What is Revenue in Business?
Revenue is the income generated from a company’s core business operations and activities. It’s also called the top line. Similarly, some call it sales or turnover.
Revenue is simply all the income your business generates before subtracting any other expenses. In other words, it is the money your company receives in exchange for goods or services.
Revenue includes sales. However, it can also include things like income from interest and rental income. These income sources, though, are typically accounted for separately.
What is the Formula for Revenue?
Calculating revenue is very easy. Just use the following formula to calculate business revenue:
Revenue = Quantity x Sale Price
Let’s look at an example:
If you own a bakery and sell 100 loaves of bread in a month for $5 each, your revenue from selling bread would be $500.
Some people also refer to revenue as a company’s top line. Why? Because revenue is typically listed at the top of the income statement.
What is Profit in Business?
Profit is the difference between the amount earned and the amount spent in buying, operating, or producing something. In other words, it’s the financial gain of a business.
Whereas revenue is the income generated before expenses, profit is the income that remains after subtracting all expenses. Expenses can include anything from inventory costs to taxes. It’s also called the bottom line or net income.
Ultimately, profit is a part of your revenue. So ideally, after subtracting all of your expenses, you will have income remaining—making your company a profitable business.
Profit is not the same thing as cash flow. Cash flow is a separate concept entirely. Be sure to read more about the differences between cash flow vs profit.
What is the Formula for Profit?
To calculate your profit, use the following formula:
Profit = Revenue – Expenses
First, let’s use the previous example in which you made $500 in sales revenue:
Imagine that between ingredients, rent, and salaries, your monthly expenses amounted to $400. In this case, your total profit for the month would only be $100, even though you sold $500 worth of products.
Profit is a subset of revenue. Therefore, you have to generate enough revenue to offset your expenses and still have income leftover to generate profit.
Different Types of Profit
There are 3 different types of profit: gross profit, operating profit, and net profit.
- Gross profit is your total sales minus the cost of goods sold
- Operating profit is your gross profit minus your business’ operating expenses
- Net profit is your remaining income after all of your expenses
Learn more about the different types of profit.
Is revenue more important than profit?
Both are very important and both can help you understand more about your business finances. That said, profit gives a more accurate understanding of your business’ finances.
Revenue vs. Profit in Real Life
To better understand the differences between revenue vs. profit, let’s take a look at a real-life example of these concepts.
For example, let’s say you own an auto repair shop. You offer several services, with a different selling price each, including:
- Oil changes: $50
- Tuning: $100
- Tire Replacement: $100
- Engine Repair: $150
- Brake Repair: $120
In October, you sell 20 oil changes, 10 tunings, five brake repairs, 10 tire replacements, and three engine repairs. Now, let’s calculate profit vs. revenue.
You would calculate your total revenue for October by adding up all the earnings:
Revenue = Quantity x Sale Price
Oil changes = $50 x 20 = $1,000
Tuning = $100 x 10 = $1,000
Break repairs = $120 x 5 = $600
Tire replacements = $100 x 10 = $1,000
Engine repairs = $150 x 3 = $450
Sum of totals: $1,000 + $1,000 + $600 + $1,000 + $450
Revenue = $4,050
To find your profit for October, you would need to compile all of your expenses and subtract them from your revenue. This could include payroll, equipment costs, utilities, taxes, and any other expense.
For this example, let’s say your monthly expenses for October are $3,150, which includes salaries, electricity, and all the materials.
Profit is the difference between revenue and cost, so you would need to subtract the expenses from the revenue:
Profit = Revenue – Expenses
Profit = $4,050 – $3,150
Profit = $900
Your net profit for October would be $900.
You can calculate both indicators for any accounting period you want: for a month, the whole year, etc. If you’re going to compare them, just make sure you’re calculating both for the same time.
Revenue vs. Profit vs. Income
|Maybe now you understand the difference between revenue and profit, but you feel like these 2 terms seem a bit too familiar with income, too. Well, don’t worry, we’re here to set the record straight.|
Here are the basic differences between revenue vs. profit vs. income.
Strengthen your Revenue and Profit
In conclusion, while there’s a big difference between revenue and profit, still, they are closely related. Therefore, understanding your financial statements and the differences between revenue vs. profit is the key to efficient accounting and budgeting practices.
Your profit and revenue are important indicators that can tell you a lot about the financial health of your small business. Therefore, you can use these figures to:
- firstly, you’ll be able to determine the pricing of your products and services
- in addition, it can help you create your project budget
- and more!
People often make the mistake of using profit and revenue interchangeably. Unfortunately, doing so is inaccurate and can have serious consequences when managing a small business.
In conclusion, by reviewing the information in this article, you can understand how profit vs. revenue are different. You’ll also understand why they are important and how to calculate your company’s revenue and profit.
Increase your knowledge and grow your business
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