Revenue vs. profit are two of the most visible and important measures that every organisation must monitor if it is to understand its performance, plan effectively, and invest wisely, among a variety of other critical duties and operations.
Each phrase has a separate use and measurement, yet despite these distinctions, the two notions are frequently confused. Here, we’ll look at the difference between revenue and profit and how to discern one from the other.
What is the Difference Between Profit vs Revenue?
Revenue is the total amount of money earned by a company from its sales. Profit is the share of money that remains after deducting a company’s operational costs, debts, taxes, and any other expenses incurred in the pursuit of revenue.
If you want to accurately assess your company’s financial health and viability, you must have a consistent picture of its revenue vs. profit. Both measures can reflect how good your sales and marketing efforts are, as well as how efficient your spending is.
It takes some effort to reduce your revenue figure to your profit figure. Let’s see how you can get from one to the other.
What is Meant by Revenue?
Revenue is a broad term that gives a broad picture of a company’s financial health. Revenue is the first number an owner, investor, or analyst sees on an income statement or balance sheet.
In general, revenue refers to an organization’s earnings during a set period of time, such as a month, quarter, or year. Revenue is a simple value computed by multiplying the quantity of products or services sold by a company by the selling price.
In other words, revenue is a monetary measure of how much a company sells and what prices it charges for those items or services in the ordinary course of business. Revenue serves as a performance indicator by highlighting notable patterns in sales and marketing. As an example:
- Increased sales volumes (i.e., more products or services sold) can result in sustained revenue growth.
- Rising revenues can also be attributed to increased sales prices (with or without an increase in the number of units sold).
- In contrast, diminishing revenue can be the result of decreasing sales volume, which can be attributed to fewer units sold, lower sales pricing, or a combination of the two.
- Falling revenue for a corporation signals grave financial problems and foretells primary sales-boosting or drastic cost-cutting actions to keep the enterprise sustainable.
While revenue is not the be-all and end-all of financial analysis, it is an important analytical tool, and the data it reflects provides significant insight into how a business is operating. Revenue is a powerful measure of whether things are heading in the right direction from the perspective of sales and growth.
The Different Types of Revenue
Revenue comes in a variety of ways, each of which provides a unique view on a company’s financial health, just like enterprises. Some revenue figures provide a high-level summary of an organization’s earnings, while others focus on specific income streams.
The following are the numerous methods for analysing revenue:
#1. Gross Revenue
This number represents a company’s earnings from the sources of income that comprise its core business, as viewed in a vacuum, without operating expenses and costs.
#2. Net Revenue
In order to gain a better understanding of a company’s financial health, net revenue accounts for operating expenses and costs and subtracts them from gross revenue.
#3. Operating Revenue
This type of revenue analyses earnings obtained solely from a company’s core or primary operations (for example, for a restaurant, operating revenue includes the sale of food and beverages from its physical location).
#4. Non-operating RevenueÂ
Businesses can generate revenue from a variety of sources, including non-traditional channels and non-operating revenue accounts for these additional income streams (for example, a popular restaurant with a loyal client base may sell branded things such as clothes and decals or sell prepaid gift cards).
The top line of an income statement or balance sheet represents revenue, which is critical information for a business owner or investor. Revenue, on the other hand, does not convey the entire picture of a company’s overall health; it signifies growth, scale, and activity and informs whether a corporation is on the right or incorrect path.
What is Meant by Profit?
Except for non-profit organisations, most businesses exist to make a profit. Although the basic idea of profit is straightforward, i.e., a company produces more money than it spends, grasping the complexity of profit necessitates a comprehension of how businesses operate.
Profit is known by numerous names, some of which are well-known and others that are slightly deceptive. Net revenue, net income, and net earnings are examples of these.
What these terms have in common is that they all involve deducting certain operating costs and expenses from a company’s revenue, or gross earnings, to arrive at a figure that indicates how much money can be reinvested back into the business, saved for a rainy day, or distributed as dividends to shareholders and investors.
Profit is commonly referred to as the bottom line since it is the final entry (at the bottom of the page) on financial reports, such as an income statement.
Profit is significant since it represents a more in-depth look at a company’s finances. It investigates what it required (and how much it costs) to bring those revenue sources to market, in addition to how much a company received from selling its products or services.
What Are the Different Types of Profit?
Profit is a good indicator of how well a business is doing. If an enterprise’s earnings allow it to pay its financial responsibilities while still having enough money to reinvest in recruiting more employees or purchasing more equipment, its prospects for long-term growth are favourable.
Assume, on the other hand, that an income statement discloses that a business is losing money (i.e., the company’s expenditures and overhead costs exceed the revenue it generates from selling its goods or services). In that circumstance, businesses must implement strategies to boost revenue, reduce costs, or both.
Profit analysis is serious business (no pun intended) because a company’s profitability metrics govern critical strategic and policy decisions. Profit can be measured in a variety of ways, but these three are the most common:
#1. Gross ProfitÂ
To get at gross profit, the direct costs of producing items (often referred to as COGS—the costs of goods sold) or providing services, such as raw materials, direct labour, and associated overhead, are removed from revenue.
#2. Operating ProfitÂ
operational profit is calculated by deducting standard operational expenses such as administrative and support staff salaries, office supplies, and R&D costs.
#3. Net ProfitÂ
The true bottom line of a business is its net profit, which is what remains after non-operating expenses such as interest on business loans and tax payments are deducted.
Revenue data may pique the interest of investors and shareholders, but profit is the driving force behind the closed-door decisions that shape a company’s future.
How to Get From Revenue to Profit
To get from revenue to profit, use the following steps:
#1. Starting With Gross Sales
Without accounting for allowances, discounts, and returns, a company’s gross sales are the most basic measure of its profits. It is the sum of the number of units of a product or service sold by a company and the price at which those units are sold.
It could be considered revenue in certain ways, but it does not truly reflect a business’s income and is usually not shown on an income statement.
#2. Getting from Gross Sales to Net Sales
Net sales are a far more practical representation of a company’s total revenue. It accounts for all of a company’s sales but takes into consideration three essential criteria that influence the pricing of a product or service:
- Allowances — Allowances are retroactive reductions that a buyer receives after discovering and reporting a problem with a product.
- Discounts —Discounts are price reductions offered by a seller to a buyer in exchange for rapid or early payment.
- Returns — Returns are partial or complete refunds given to buyers for returning a goods.
Once those elements are incorporated into a company’s financial reporting, the company’s true revenue becomes more evident.
#3. Getting from Net Sales to Gross Profit
Once you’ve determined your net sales, you can calculate your gross profit by removing the cost of goods sold (COGS) from your net sales figure. COGS are the costs directly linked to the production of your product, such as raw materials and labour.
#4. Getting from Gross Profit to Earnings Before Interest and Taxes (EBIT)
After calculating your gross profit, you would reduce it to earnings before interest and taxes (EBIT) (also known as operating profit) by deducting your operating costs—the costs associated with the resources your business relies on to run, such as employee salaries, rent, legal fees, sales expenses, and marketing costs.
#5. Getting from EBIT to Net Profit
As you might expect, you may calculate your net profit by deducting the value of any interest or taxes you pay from your earnings before interest and taxes. That final figure is the most accurate representation of your company’s profitability over a specific time period.
How To Calculate Revenue vs. Profit
When you know the formulas, calculating revenue vs. profit is simple. However, because the profit formula requires revenue, you must always compute revenue first.
To compute revenue, multiply the subscription charge by the number of memberships active at the same time, minus any refunds.
Formula to calculate revenue
Revenue = subscription price x Number of subscriptions – Refunds
To receive revenue, make sure to use data from the same time period. If you’re computing monthly revenue, for example, use the monthly membership price and the total number of monthly subscribers.
The subscription price here may change depending on the tiers (or plans). Likewise, you may provide a discount for a yearly subscription. If this is the case, multiply the various subscription prices by the number of customers on that plan and total the products purchased.
Once you have the revenue, subtract total expenses (COGS, operational expenses, loans, and taxes) from total revenue and other income to compute profit (or net profit).
Formula to calculate total profits
Total Profit = Total Income – Total Expenses
To calculate your profit or bottom line, you must account for all cash inflows and outflows. Other income in this context includes earnings from investments or the sale of an asset.
Now that you understand how to measure revenue vs. profit, let’s discuss some other SaaS indicators you should be aware of as a SaaS business owner.
Revenue vs. Profit Example
The income statement for Apple Inc. as of the end of the fiscal year in 2022 is shown here, taken from the company’s 10-K statement.
Apple Inc. (AAPL) reported net sales of £394,328 billion for the month, an increase of more than £28 billion over the same period last year.
Apple must subtract all expenses related to running the firm after recognising revenue. This comprises deducting the cost of sales, operational expenditures, other expenses, and income tax provisions from revenue.
All of these expenses are deducted from revenues to arrive at net income (earnings). Apple reported a net income (profits) of £99,803 billion in 2022 (a £5 billion rise from the same time in 2021).
How Much of Revenue is Profit?
The amount of profit earned in relation to revenue is determined by your gross margin. It deducts the cost of revenue from the net revenue to determine how much money you keep for every dollar earned.
Can Profit be Higher than Revenue?
When a company’s income from non-core business operations, such as the sale of investments, temporarily surpasses operational costs, net profit might be greater than revenue. For example, if a company earns £50,000 in revenue with £10,000 in running costs and sells assets worth £20,000, its net profit of £60,000 exceeds revenue.
Is Revenue the Same As Sales?
Sales are another term for revenue. However, revenue is any cash generated by a corporation before expenses are deducted, whereas sales are what the company receives from selling goods and services to its consumers.
What Is More Important, Profit or Revenue?
Profit provides a more accurate representation of a company’s financial status, yet both are significant. This is because a company’s liabilities and other expenses, such as payroll, are already taken into account when calculating profit.
How Much of Revenue Is Profit?
Profit is the amount of revenue that remains after deducting expenses, debts, net income, and operating costs.
Final Thoughts
Analysing an enterprise’s financial health can be a difficult task. The top and bottom lines of a company’s income statement, respectively, are represented by the measurements of revenue and profit.
Revenue and profit tell only part of the story separately. Nonetheless, when these factors are combined, they reveal whether a company is reaching sales forecasts and turning a profit or falling short and going in the red.
Related Articles
- Gross Profit vs. Net Profit: Meaning, Formulas & All You Need
- SMALL BUSINESS IDEAS IN UK: 65+ Profitable Ideas
- EBITDA Margin: What It Is, Formula & All You Need
- What is Gross Income? Definition, Formula & Example
- What Is Capital In Business? All You Need To Know
References
