Are you looking to grow your business? If so, you must understand the difference between revenue vs profit.
Many people mistakenly believe that these two terms are interchangeable, but they couldn’t be more different. Revenue is the total amount of money that a company brings in from sales or other sources. Profit, on the other hand, is the portion of revenue that remains after all expenses have been paid.
To grow your business, you need to understand the difference between revenue vs profit.
Revenue vs Profit: Which is More Important?
Tracking revenue and profits are important to businesses. Total revenue is how much money a company makes, while net profit is the money left over after paying all business-related costs.
While revenue is important, profit is what ultimately determines whether a business is successful or not.
Revenue is the total amount of money that a company earns from normal business activities, while profit is the money that is left after subtracting all business-related costs from total sales. Therefore, if revenue is a superset, then profits would be a subset of it.
A company cannot make any profit without earning any amount of revenue.
Let’s use an example.
In 2017, Giant Inc made $100,000 in revenue and $10,000 in profits.
If there is no revenue, then the profit would be nil.
But, on the other hand, companies can also lose money.
Let’s imagine a company just opened for business. And, right off the bat, it spent $40,000.
Unfortunately, the business generated no revenue at the year-end, resulting in a loss of $40,000.
To truly understand revenue and profit, one must first understand the income statement.
If you understand the basics of the income statement, the rest of the financials will come easily.
How to Read an Income Statement
The first thing you will see on an income statement is Gross Sales. This is the total amount of money made from selling a product.
However, from this number, we need to subtract returns, allowances, rebates, and any other discount. This will give us Net Sales — or what we call Revenue.
Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, labor costs, and other direct costs. However, it excludes all the indirect expenses incurred by the company.
From net sales, we would get the Gross Profit. And then, from gross profit, we will deduct the operating costs, and we would get an operating profit, which is also called EBIT (Earnings Before Interests and Taxes).
EBIT denotes the organization’s profit from business operations while excluding all taxes and costs of capital.
Then from EBIT, we would deduct the interest and taxes and we would get PAT (Profit After Taxes).
PAT can also be termed as net profit.
Profit cannot exist if there’s no revenue. But revenue can exist without profit.
Profit is the money you make after subtracting your expenses from the revenue. To figure out your total revenue, multiply the total number of goods sold by the sale price of each good.
Profit can be of two types – gross profit and net profit.
Revenue can also be of two types – operating revenue and non-operating revenue.
Which is a More Important Number: Revenue or Profit?
While both metrics are important, net profit is a more complete metric of financial health. It accounts for all costs, such as overhead, and shows how well the company is handling its money.
Knowing how to calculate your gross profit margin can help you understand your company’s sales, production, and overhead costs. A higher gross margin percentage means that you’re selling more products for less money, which is a great sign.
Gross profit, however, is not the most accurate measurement of a business’s true financial state because it ignores all expenses not directly related to production or selling.
Net profit, or bottom line, is the number that shows how profitable a business is.
Know the Difference – Grow Your Business
Profit and revenue are two of the most important indicators of your small business’s financial health. By tracking these numbers, you can get a good idea of how your business is doing financially and make necessary changes to pricing, budgeting, and inventory.
While revenue and profit are related, they are nonetheless different. Revenue is the sum of all sales. Profit is how much money is left after all business expenses and taxes have been paid.
Knowing the difference between your revenue, your gross profit, and your net profit is key to understanding your accounting.
If you want to grow your business, it’s important to focus on generating both revenue and profit. Understanding the difference between revenue vs profit is essential for success. By increasing both revenue and profits, you’ll be well on your way to achieving your goals.