Whether you are a small business owner juggling many hats or an established company with separate departments, knowing what your revenue and profits are is essential.
Both can provide valuable information about your business’s financial wellbeing and viability.
They can alert you that changes need to be made or that success has finally arrived after all your hard work.
Together, the two can inform you how effective your marketing and sales efforts are and whether budgets and spending are compatible.
You may even be required or inspired to find ways to increase revenue, such as by incorporating more sales intelligence into your marketing strategy or focusing on ways to cut expenses to increase profits.
You don’t have to be the financial or accounting whiz in the office, however, to grasp the importance of these two concepts and how they differ.
Understanding how your revenue and profit affect all areas of your business is a good start to understanding what your success can look like.
What is Revenue?
Revenue is your company’s big picture item. It is the total amount of income generated by the core business operations of your company.
More simply put, revenue is the money received in exchange for the goods or services you offer.
Revenue is also split into operating and non-operating categories:
Operating Revenue
Operating revenue is the money earned through the principal business activities.
For example, a retailer’s principal business is the sale of goods, while a surgical facility provides medical services as its principal business activity.
Looking at operating revenue can give you valuable information about a company’s core business activities and productivity.
Non-Operating Revenue
Non-operating revenue results from business activities that are not considered to be part of the core or principal operations.
While not as common and not applicable to all businesses, non-operating revenue can exist and may include such sources as asset sales, interest income, and other earnings relating to activities not related to the core business.
An example of non-operating revenue is donations received, which are not considered part of a business’s primary operations.
What is Profit?
While revenue may seem like the star of the show, profit is the true bottom line.
What exactly it is?
Profit is the difference between the income earned and the expenses required to operate or produce something. It is the financial gain of your business.
The expenses may include operating costs, inventory costs, taxes, debt, and other costs encountered during the normal course of business.
To generate a profit, then, your company needs to gain revenue that will more than offset those expenses.
A net loss is possible, however, even if a company generates high revenue. This occurs when a company’s expenses and debts outweigh earnings.
Referred to as net income on your income statement, it literally sits on the bottom line and is a solid indicator of your performance and, often, your success.
The different types of profit include:
Gross Profit
Gross profit is your total revenue minus the total cost of goods or services sold. These costs may include:
- manufacturing costs, including the cost of necessary materials
- direct labor costs
- inventory costs
If you are a software company, such expenses may also include hosting costs or other required services.
Knowing your gross profit gives you a closer look at how well you manage manufacturing or production costs as part of your goal to earn more revenue.
Operating Profit
Operating profit is the amount you have after subtracting other operating expenses (fixed or variable) from your gross profit.
These operating expenses may include payroll, digital marketing budget, software, and office costs such as rent, utilities, and supplies. Here is where you include any expenses relating to the operating and growth of your business.
Net Profit
Net Profit is the total amount left after deducting all your business expenses, including taxes, from your revenue.
Often called the net income, net profit is the key component when discerning a business’ total profitability. In turn, it serves as a clue as to how well the company is managed.
By looking at all three, the gross, operating, and net profit, you can find out where the most opportunities lie for improvement. This information can encourage you to find more efficient ways to operate.
For example, if marketing expenses are high and ROI is not what you hoped for, you can look for ways to lower the customer acquisition cost, such as by limiting or switching your marketing channels or modifying your digital marketing funnel.
What are the Differences Between Profit and Revenue?
Both revenue and profit are strong indicators of the financial wellbeing and viability of a company.
By closely looking at these two amounts, you can tell a lot about a business at any given time.
Yet, there are differences. While you can earn revenue without generating profit, it’s not possible to generate profit without gaining enough revenue.
Also, since revenue sits on the top line of a company’s income statement, and profit is the bottom line, profit can never be higher than revenue.
In essence, the primary difference between the two is this. Revenue is the money received before expenses are deducted.
Profit is your income left over after those expenses, the amount you have to reinvest, save, or allocate to other business areas.
Regardless of how much revenue a business earns, it can still come up negative in terms of profit, and this can lead to extreme losses. It won’t be able to stay afloat forever and may eventually go under if expenses start to exceed the amount coming in.
On another note, many confuse revenue with sales, but these two mean different things for your company.
Revenue is the income you receive from core business operations or activities combined with non-operating income (such as asset sales).
Sales, on the other hand, is the income accumulated as a direct result of selling your goods or services to customers over a set time period.
All three, revenue, sales, and profit, are important in different ways, and you can expect them to be an essential part of business presentations and measures to build upon going forward.
Revenues vs Profit Example
One way to clearly understand the difference between revenue and profit is to look at an example. While it may or may not model reality, it can serve as a way to show both revenue and profit.
- Quantity x Sales Price = Revenue
Say your company is a manufacturer of specialty allergen air filters for the home. You sell 2,000 of them at $25 each, making your revenue $50,000.
- Revenue – Expenses = Profit
Fortunately, your company has perfected and streamlined the production of those air filters. Expenses for materials, labor and other items are calculated at $15,000. Deducting this amount from your revenue of $50,000 leaves you with a profit of $35,000.
There are many examples in the business world today also. From Target to DocuSign, revenue and profit go hand-in-hand.
What Is More Important, Profit or Revenue?
There’s no question that both profit and revenue are important to a business. You’ll need both to report the performance of your company to management and investors and to measure your growth.
Yet, one of these does stand a little higher when it comes to importance, and that is profit. Profit provides a more accurate, realistic depiction of a company’s financial position.
The reason for this is that profit shows what you clear after deducting all the company’s liabilities and expenditures.
If it is positive, your company is succeeding even if the profit is not as high as you would like. Much, of course, will depend on where you are with your business.
For example, start-ups will encounter more costs in the initial years. Businesses undergoing upgrades or entering a new market will have associated costs. Either of these situations can deeply cut into profits.
If it is negative, net losses (where expenses exceed revenue) without such a temporary justification become a red flag, signaling that the business may be ill-managed or too costly to run.
Wrap Up: Revenue vs Profit. Now You Know the Difference
The more you understand the difference between revenue and profit, the better you will be able to monitor your business’ financial wellbeing and overall viability. With this knowledge, you can pinpoint areas where expenses impact profits and explore ways to optimize manufacturing or operating costs.
It’s essential to recognize that revenue and profit are intertwined, playing a pivotal role in shaping your company’s success. They provide valuable insights for potential partners and investors and significantly impact your company’s market value.
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