What is the difference between revenue and profit?
Knowing the difference between revenue and profit is essential for the financial health of your business. The words revenue and profit are generally used synonymously, but they represent different things on your company’s income statement.
Revenue is the money your business makes from different activities – for example, selling goods or delivering services.
Profit is what is left over after you’ve paid all of your expenses and bills.
As well as understanding the difference between revenue and profit, there are also some other terms that you should familiarize yourself with when getting to grips with your company’s financial health. Accountants are experts in finance and will often use terms that you may not fully understand. Having a basic knowledge of what different accounting terms mean will help you to keep up with what your accountant is doing. After all, as a business owner, you are ultimately responsible for your accounts. Having a grasp of accounting terms is of particular importance when preparing and submitting your tax return because inaccurate information can lead to fines for your business.
Even though you may use accounting software which automates some functions, like linking the number of hours your employees work directly to payroll, you should still aim to have an understanding of accounting terms to be certain that you’re including the right numbers in the appropriate places. Below are descriptions of revenue and profit and related accounting terms to help you distinguish between crucial financial terms:
- Revenue vs. profit
- Revenue vs. sales
- Sales revenue
- Gross revenue
- Gross income vs. net income
- Gross profits
- Net profit
A more comprehensive definition of revenue is the amount you receive from the sale of goods and services and from other day to day operations. Therefore, revenue is earned every time you sell something for either credit or cash. The revenue produced from your sales is known as your turnover. There are two types of revenue:
- Operating revenue is generated from your usual business activities.
- Non-operating revenue is produced by other business activities, such as rent and dividends.
The full definition of profit is the financial gain your company makes when the amount you earn from selling goods and services is more than what you spend on producing or buying the goods and other expenses. The following are the two types of profit:
- Gross profit is the profit after you subtract your trading expenses from your sales.
- Net profit is the profit after you deduct administration, office and selling expenses and other expenses from your revenue.
Revenue vs. profit – a side by side comparison chart
|Definition||Generated from sales of goods and services over a specified period.||Balance (after subtracting expenses and tax).|
|Formula||Revenue = total sales – total returns.||Profit = total revenue – total expenses.|
|Types||Different types – operating revenue, and non- operating revenue.||Different types – gross profit and net profit.|
|Position on financial statement||Recorded on the trading account.||Recorded on the income statement.|
|Importance||Necessary for operating a business.||Necessary for business growth and survival.|
Similar to revenue and profit, some people also use the terms revenue and sales interchangeably. However, they mean different things for your business. As explained above, revenue means income that your business makes from operating activities (everyday business activities) and non-operating activities (for example, selling equipment that you no longer use).
The definition of sales is the income you accumulate from selling goods or services over a specified period.
Sales revenue can also be used to refer to sales and is the amount generated by your business from the goods or services you sell – for example, if a retailer’s core business is selling shoes. Whatever the retailer earns over a specified period of time from selling shoes is its sales revenue. If this retailer has an investment of $1 million and earns $100,000 per year, this won’t be counted as part of its sales revenue.
Your sales revenue is generally reported over a specified period of time, such as monthly, quarterly or annually. Sales revenue should be compared against your net profits to determine the percentage of sales revenue that ends up as profit.
The following are two categories of sales revenue:
- Gross sales revenue means all the billings and receipts you receive from selling your goods and services. This amount does not contain deductions from sales returns and allowances. Price reductions (or rebates) given to customers as an incentive to keep items instead of returning them are known as allowances.
- Net sales revenue also referred to as net sales or net revenue is the money you generate from your transactions with customers. Net sales revenue is the total amount that you’ve made from sales subtracting product returns and allowances.
- Net sales revenue also consists of discounts from some types of sales discounts. For instance, a company may offer an item for sale for $2,000, but give a 10% discount where a customer pays the whole price upfront instead of opting for an installment plan. In this instance, the company would have $2,000 gross revenue, a $200 discount and $1,800 for net sales revenue.
- Net sales revenue gives a better representation of how much money you get from your customers and clients. To work out your net sales revenue, subtract any sales and allowances from your sales revenue amount.
The definition of gross revenue is the total amount of your sales over a specified period before any deductions are made. This amount will provide you with insight into your business capability to sell goods and services, but it doesn’t give an indication of whether you are making a profit. It follows that, if someone is buying a business, the focus should not be on gross revenue. An exception to this is if the business in question is service-based where there are no returns. Sales returns and sales discounts are deductions from gross revenue. After these deductions from gross revenue have been made, the remainder is known as net sales or net revenue.
Income statements for your business must account for both gross and net income. Working out your gross and net income shows you what your biggest expenses are and also shows you your top-performing goods. You also need to provide details of your gross income and your net income when completing and submitting your tax return.
Gross income is made up of all of the income earned through your business over the year. To work out your gross income, add up the following for the year:
- Credit card charges
- Interest and dividends
- Rental income
- Promissory notes
- Canceled debts
- Damages and lost income payments
In order to work out your gross income, there should be no deductions applied.
Net income consists of the profit your business makes after you subtract business expenses and deductibles from your gross income. You must subtract business expenses from your gross income to calculate your net income. The following are common business expenses that can be deducted from your gross income:
- Advertising expenses
- Vehicle operation costs
- Cost of goods sold
- Mortgage interest
- Office expenses
- Rent payments
- Employee wages
Net income is the figure that represents the bottom line of how a business is performing. Net income is the profit that has been generated by a business. In the event that more money went out of a business than the amount that came in, the business isn’t profitable for the specified period since it has a net loss.
Therefore, gross income versus net income is all about your annual business income versus the profit your business makes for the year.
You arrive at your gross profit by subtracting the value of goods that your customer has returned and sales discounts. The cost of goods sold deducted from your revenue is also used to calculate your gross profit. The cost of goods sold is defined as the cost you are responsible for in relation to manufacturing or selling your products. An example of a retailer’s cost of goods will be the amount they pay for their merchandise that will be sold to their customers. Your gross profit will let you know how much your business earned from selling goods and services before taking out administrative expenses.
The definition of net profit is the number of sales dollars you have left after all operating expenses, taxes, interests, and preferred stock dividends (not common stock dividends) have been subtracted from your company’s total revenue. You’ll find your net profit on the last line of your company’s income statement. Net profit is also known as the company’s net income, bottom line or net earnings.
The following is the formula for net profit:
Total revenue – total expenses = net profit.
Here’s an example of an income statement showing how the net profit is worked out:
Total revenue – $50,000
Cost of goods sold – $10,000
Gross profit – $40,000
Employee wages – $5,000
Utilities – $5,000
Rent – $5,000
Vehicle operation costs – $5,000
Total Operating expenses – $20,000
Taxes – $5,000
Net Profit – $15,000
According to this formula, the net profit has been worked out as = $50,000 – $10,000 – $5,000 – $5,000 – $5,000 – $5,000 – $5,000 = $15,000
Net profit is one of the best indicators of a company’s financial health. Where a company has shareholders, the net profit is closely scrutinized because this determines how much the shareholders will receive.
Grow your Business
From the definitions above, it’s clear that there’s a difference between revenue and profit. To make matters more confusing, there are also other terms that are used synonymously with revenue and profit. The main point is that you know what each of the terms means for your business.
One of the most important keys to note is that your profit will originate from your revenue. Therefore, it’s vital to track both your revenue and profit if you want to grow your business. Analyzing your financial statements to take the necessary action is the next step after understanding what the terms mean.
One of the biggest expenses for business is employee wages. This amount can fluctuate if you employ hourly workers. To ensure that your employees are being paid the right amount according to the shifts they’ve worked and to make informed decisions about the profitability of using a certain number of employees at given periods, you should utilize a workforce management software that integrates with your payroll system.
Deputy integrates seamlessly with your payroll system to provide you with an easy way to determine how employee wages affect your profits. Schedule time to chat with one of our team members below to see how Deputy’s low-cost workforce management system can have a positive effect on your company’s bottom line.
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