One thing that is true about any business, regardless of the industry, is that there is a ton of jargon to get your head around.
I mean, even the term jargon can be quite confusing!
A common terminology confusion you will come across early in your journey is revenue vs profit. The two terms are often used interchangeably when, in actual fact, they differ significantly.
For example, you’ll likely hear someone describe a business as “profitable,” but you’ll never hear them say a business is “revenuable.”
Or a fellow entrepreneur might brag about bringing in X revenue per month, but that doesn’t mean they can buy a new beach house with that money.
Here, we will break down the differences between revenue and profit once and for all, and highlight why it’s important to keep the two separate when discussing or reviewing your business.
Revenue vs Profit Takeaways
- Revenue is the term used for your total income and is also referred to as the “top line.”
- Profit is the term used for revenue after expenses and is therefore known as the “bottom line.”
- When determining the financial success of a business, the profit margin is much more important than the revenue generated.
Revenue Explained
Let’s start with the term revenue, which is the total income for a company over the course of a tax year.
It is a culmination of all income from every channel of your brand, whether it be product sales, services, or income from other areas such as subscriptions, YouTube ads, and so on.
However, when looking solely at the revenue of a brand, it can be easy to assume a business is making more money than it actually is, as the revenue figure does not factor in any outgoings.
For example, if a business makes 100K in revenue, that figure does not factor in expenses such as manufacturing costs, digital subscriptions, and office costs.
However, you can’t have profit without revenue. So, it’s the first indicator that your business is working.
Profit Explained
Now, let’s look at profit and when you should be using or referring to this figure. Profit is the term used for the total figure when you take your revenue and subtract your costs.
So, using our 100K revenue example, if your overall costs last year amounted to 20K, then your total profit for the year would be 80K.
$100,000 (Revenue) – $20,000 (Costs) = $80,000 (Profit)
Some of the most common costs a business would accrue that could impact its profit margins include product development, employee salaries, and customer acquisition costs.
When identifying financially successful businesses, it’s always important to focus more on the profit rather than the revenue. A business could make 200K in revenue, but if they spent 180k on supplying products, paying staff, and gaining new customers, their profit would only 20k.
On the flip side, another business may only make 50K revenue, but if their expenses amount to 20K, then they would be 10K more profitable than our 200K business.
However, if the 200K revenue business is able to significantly reduce those expenses in the coming years, then it is in a better position to grow, as its revenue is much higher.
Pro Tip: Startups looking to fundraise don’t need to showcase profitability at the start. Investors are more concerned about the revenue and market awareness.
Calculating Revenue to Profit
Now, even I got a little confused writing out the examples above, so if you are still unsure how profit and revenue differ and the relationship between the two, let’s break it down with a simple calculation.
- Calculate Revenue. Collate all revenue sources and pull out your top-line figure.
- Calculate the Cost of Goods Sold (COGS). Work out the cost of producing or purchasing the products that you sold during the period.
- Calculate Gross Profit. Subtract your COGS figure from your revenue figure.
- Calculate Operating Expenses. Work out the expenses incurred to run your business, such as bills, salaries, and marketing expenses.
- Calculate the Operating Profit. Subtract those operating expenses from the gross profit figure to get your operating profit.
Revenue – COGS = Gross Profit
Gross Profit – Operating Expenses = Operating Profit
Get more financial concepts and calculations:
- 16 Financial Concepts Every Entrepreneur Needs to Know
- What Is ROI? And How Can You Calculate It like a Pro?
- Profit Margin Formula
- COGS Formula
- What Is EBITA?
Frequently Asked Questions About Revenue and Profit
Can profit be higher than revenue?
No, revenue is the largest figure on a company’s income statement, and profit is always a figure that is lower than that.
Is profit or revenue more important?
Profit is the most important figure to track, as it provides you with a much clearer idea of how much money your company is making. However, if you’re raising money in a bull market, investors might care more about your revenue or customer numbers rather than profitability.
How much of revenue is profit?
In simple terms, profit is the figure that remains once you deduct any expenses or outgoings from a company’s revenue.
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Revenue vs Profit Is Just the Start
As you can see, there are significant differences between revenue and profit, and they should be used very differently when discussing your brand’s finances.
For a breakdown of other confusing terms and business strategies, check out our free ecommerce masterclass.
The post Revenue vs Profit: What’s the Difference and Why it Matters appeared first on Foundr.
