When examining your small business’ finances, it’s important to understand what’s the difference when it comes to revenue vs profit.
To accurately manage your company’s finances and create a sufficient budget, you need to be able to differentiate between the two.
While people often use these terms interchangeably, revenue and profit are two very different concepts. Using these terms interchangeably can lead to critical accounting and budgeting mistakes.
Let’s take an in-depth look at revenue vs profit, how to calculate each one, and why these concepts are important.
What Is the Difference Between Revenue and Profit?
Revenue and profit are both very strong indicators of your company’s financial wellbeing. While they are both important concepts, it is important to understand their differences to accurately assess your business’ finances.
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||Revenue can be generated without profit||Profit cannot be generated 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?
Revenue is the income that a business has from its normal business activities, usually from the sale of goods and services to customers. Revenue is also referred to as sales or turnover.
Revenue is simply all of the income your business generates before any expenses are taken out. It is the amount of money your company receives in exchange for goods or services.
Revenue is typically used to refer to sales revenue; however, it can also include things such as rental income or income from interest. 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
For 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.
Revenue is generally referred to as a company’s top line because revenue is typically listed at the top of the income statement.
What is Profit?
Profit is the financial gain of a business, or the difference between the amount earned and the amount spent in buying, operating, or producing something.
Whereas revenue is your business’ income before expenses, profit is the income that remains after all expenses are accounted for. Expenses can include anything from inventory costs to taxes. Profit is often referred to as a company’s bottom line or net income.
Ultimately, profit is a part of revenue. 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
Using the previous example in which you made $500 in 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. To generate profit, you have to generate enough revenue to offset your expenses and still have income leftover.
Different Types of Profit
Profit can be broken down further into three different categories: 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.
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 get a better understanding of the differences between revenue vs profit, let’s take a look at a real-life example of these concepts.
Let’s say you own an auto repair shop. You offer several different services for different prices, 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.
Your October revenue would be calculated adding up all of the earnings:
$50 x 20 oil changes = $1,000
$100 x 10 tunings = $1,000
$120 x 5 break repairs = $600
$100 x 10 tire replacements = $1,000
$150 x 3 engine repairs = $450
$1,000 + $1,000 + $600 + $1,000 + $450 = $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.
To calculate your profits, you would subtract the expenses from the revenue:
$4,050 – $3,150 = $900
Your net profit for October would be $900.
Grow your revenue and make more profit
Ultimately, while revenue and profit are closely related, they are also very different. Understanding 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. You can use these figures to determine the pricing of your products and services, to create your annual budget, and more.
While people often make the mistake of using revenue and profit interchangeably, doing so is very inaccurate and can have some serious consequences when managing a small business.
But, by reviewing the information in this article, you can understand how revenue and profit are different, why they are important, and how to calculate your company’s revenue and profit.
At Camino Financial, we operate on the motto, “No Business Left Behind.” We are dedicated to helping small businesses get the resources and information they need to grow.
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