As a business owner, you know the importance of keeping track of your income and expenses. Revenue and profit are two of the most crucial metrics for any business's financial health. These numbers can tell you whether a company is thriving or failing, and they're both vital to consider when evaluating a company's financial health. But what exactly do revenue and profit mean? How do they differ from each other? And how do you calculate them correctly?
While revenue refers to all income generated by your company in a particular period, profit denotes the amount left after subtracting all costs, expenses, and deductions. Make sure you accurately understand revenue and profit to make informed business decisions.
Revenue for a business
Revenue is not the same as profit. Revenue is the total income generated by selling goods or services related to a company's primary operations. When you purchase a pair of shoes from a retailer, that's revenue for the shoe retailer because you chose to buy their shoes. Any money received is considered revenue if a manufacturer makes widgets for sale. Revenue is sometimes called the top line because it sits at the top of an income statement.
You can use the following formula to calculate your business revenue:
Revenue = No. of units sold x Selling price per unit.
For example, if you run a restaurant that sells meals for $20 each and you sell 100 meals in one day, your revenue would equal $2,000 (100 x 20). However, this figure doesn't consider any expenses incurred during that period.
Sales are a familiar name for revenue. However, sales are the money a company makes through offering goods and services to clients, whereas revenue is whatever cash a corporation generates before expenses are deducted.
Profit for a business
Profit is the income that remains after accounting for all expenses, debts, additional income streams, and operating costs. In other words, it's what's left over once revenue has received all the deductions. There are several different types of profit calculated during the financial reporting process. Still, they're various measures of profitability that help investors gain insight into a company's overall financial health.
The three different types of profit business owners will want to know are:
Gross profit is the total sales minus the cost of goods sold.
Operating profit is your gross profit minus your operating expenses- an expense a business incurs through its normal business operations.
Net profit is the remaining income after all the expenses.
To calculate your small business profit, you can use the following formula:
Profit = Revenue – Expenses
Let's say your restaurant made sales totaling $2 million but had operating costs totaling $1 million (including salaries for its employees); then it would report an annual loss of $1 million for its fiscal year—even though it sold twice as many meals as last year!
For a company to make more profit than revenue at any given time (known as being profitable), it must make some profit from secondary incomes—like interest earned from investments in stocks or bonds—or from selling off assets that have depreciated over time (such as real estate).
Read more about creating a profit and loss statement for small businesses?
What is more important, profit or revenue?
Without revenue, there can be no profit; without profit, revenue can be earned, but if the revenue is lesser than expenses, there will be a loss.
An organization's financial status can be better understood by looking at its profit. This is because a company's liabilities and other costs, such as payroll, are already considered when determining its profit.
The difference between profit and revenue
Every company must understand the distinction between revenue and profit, and some key takeaways are the following:
Revenue and profit are two different measures of a company's finances.
You can use revenue and profit to judge the success or failure of your business.
Revenue is also referred to as sales or the top line.
Profit is often referred to net profit or the bottom line.
While revenue and profit refer to the money a business makes, it is possible for a company to make revenue but still make a net loss.
Revenue and profit can fluctuate significantly depending on the circumstances. Suppose a company has an unusually high number of sales at the end of the year (due to holiday purchases). In that case, its revenue will be higher than usual. The same is true for companies that cut costs or decrease their expenses during certain months: their profits will increase compared with other periods because they're not spending as much on labor or other resources.
Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.