Revenue vs. Profit: What's the Difference?

Revenue describes income generated through business operations, while profit describes net income after deducting expenses from earnings. Revenue can take various forms, such as sales, income from fees, and income generated by property. A company can bring in large amounts of revenue, but there will be no remaining profit if expenses exceed revenue.

Revenue vs. profit at a glance

Both revenue and profit reflect a company's income, but in different ways and appear at different parts of a company's income statement.

What is revenue?

Revenue refers to the total income a company generates over a period of time before subtracting expenses.

• Top line is another term for revenue as it sits at the top of a company's income statement.
• Operating revenue refers to the income a company earns from its core business operations.
• Non-operating revenue is income a company generates from activities not related to core business operations, such as revenue from interest or asset sales. Non-operating revenue should be separated from the top line for accounting and tax purposes.

What is profit?

Profit is essentially revenue minus expenses, debts, taxes and other deductions.

• Bottom line is another term for profit as it sits at the bottom of a company's income statement.
• Gross profit refers to the total amount of income a company produces after deducting all direct costs of production. Gross profit margin is a company's net sales minus the cost of goods sold.
• Operating profit is income a company earns after deducting operating costs but before deducting taxes and interest expenses.
• Net profit is the clearest indicator of a company's financial performance, as it is the final amount of income after deducting all the expenses from the total revenue.

Revenue on the income statement

Revenue is the term for income brought in from operations. Revenue typically takes the form of sales, but a business may generate income in various ways from fees, interest, real estate, sales taxes collected, donations, grants, investments, and other forms.

A company's revenue is the first line on its income statement. Gross revenue is the sum of all proceeds generated by the business. For a manufacturing company, this represents all merchandise sold regardless of the cost to produce it. For a non-profit, it would represent all income earned from fundraising, donations, grants, etc. Revenue may be divided into operating revenue and non-operating revenue, which describes incidental or secondary sources of income.

Gross profits are the difference between gross revenue and expenses directly related to it. For a company that manufactures and sells clothing, total revenue equals net sales. The cost of goods sold, which includes manufacturing costs, raw materials, and selling expenses such as commission, is then deducted. The difference between revenue and the cost of goods sold is shown as gross profits.

What is gross vs. net revenue?

Gross revenue, or gross income, is the total sum of all sales a business generates without considering expenses. Net revenue is the total amount of money a company generates after accounting for revenue expenses, such as discounts, refunds, and returns.

What affects revenue?

Demand is one of the main factors that impact revenue. If a company offers a product that's in high demand, it is more likely to see revenue growth. If the demand lessens, revenue may also drop. Similarly, seasonal appeal also influences revenue. For example, ice cream shops and swimsuit brands will have higher revenue in summer than in winter.

Competition within the market can also impact revenue. Even if an item is in season and in demand, a company may have to adjust its prices to maintain competitive positioning and boost revenue. Sales revenue will also fluctuate based on economic conditions. Rises or drops in a country's overall economy often impact consumer spending.

Profit on the income statement

Profits, often called net profits, are literally placed at the bottom line on an income statement. Net profit accounts for income remaining after all operating costs and other expenses are subtracted from net revenue. Net revenue only considers expenses directly tied to revenue. In contrast, net profit further reduces revenue by deducting all other fixed and variable costs such as payroll, rent, insurance, supplies, utilities, and maintenance. Whatever amount of revenue remains after expenses is net profit, and any shortfall is a net operating loss.

Although you might use these two terms interchangeably, a company can generate significant gross revenue or significant gross profits while operating at a net loss, depending on operating costs, investments, and taxes.

Types of profit

• Gross profit includes manufacturing costs—such as raw materials, inventory, and labor. Knowing your gross profit offers insights into how your manufacturing or production costs impact your overall profit return.
• Operating profit further subtracts operating expenses—such as payroll, marketing efforts, software, and office costs—from gross profit. By tracking operating profit, you can see how efficiently your company manages expenses to maximize profitability.
• Net profit is the final sum after deducting taxes and interest costs from operating profit. This number reveals your company's overall profitability.

It's essential to look at all three—gross, operating, and net profit—to spot areas where you can boost efficiency and improve your company's profitability.

What affects profit?

While the same factors that impact revenue will also impact profit, the reverse will vary. For example, if you can detect areas for improvement in your gross and operating profit and, in turn, reduce your cost of goods and operating expenses, you can boost your profit without impacting your revenue.

If your cost of goods and operating expenses are already efficient, look at how you manage your interest and taxes. A company can increase profit margins without boosting revenue by lowering interest rates in exchange for equity or legal tax avoidance strategies. However, both methods require thorough consideration and legal advice.

Revenue vs. profit: Key differences

So, what are the key differences between profit and revenue?

• Revenue and profit both refer to the income a business earns.
• Revenue is money a business earns from operating.
• Profit is money a business retains after subtracting operating and other expenses.
• Both impact business decisions, but in different ways.
• Revenue offers insight into a business’ growth and market demand.
• Profit is a clearer picture of a company's financial position.
• Revenue is also affected by outside factors, such as economic conditions.
• Profit is more directly affected by management.
• It's possible to earn high revenue while still incurring a net loss.
• Revenue is the "top line" of an income statement, and profit is the "bottom line."

How to calculate revenue and profit in five steps

Companies calculate their income statements by reporting their revenue and then subtracting expenses until they can report their net profit. Here are the steps involved in getting from one number to the other:

1. Calculate Gross Sales

Total units sold x price per unit

Calculate this figure by adding together all sales receipts before discounts, returns, and allowances. In other words, multiply the total number of units sold by their price points. This number allows companies to examine their annual growth before considering operating and other expenses.

2. Determine Net Revenue

Gross sales: returns/discounts

Gather all revenue sources that directly reduce gross revenue—such as discounts, refunds, and returns—and subtract them from your gross revenue. This number offers a clearer picture of how much money your company made from sales before factoring in expenses.

3. Compute Gross Profit

Net revenue: the cost of goods sold

Subtract the cost of goods sold—such as materials, manufacturing, and labor costs—from your company's net revenue. This number reflects how much money you spent creating the products sold before considering administrative costs.

4. Find Operating Profit

Gross profit: operating expenses

Subtract operating expenses—such as salaries, marketing expenses, rent, utilities, maintenance and repairs, and property taxes—from your gross profit. This number shows how much money your management team spent running your business.

5. Establish Net Profit

Operating profit: interest + taxes

Calculate the cost of interest expenses and taxes paid during that year. Then, subtract the sum from your operating profit. This number reflects how well your company's profit balances against debts and other expenses.

Which is a more important number—profit vs. revenue?

While both revenue and profit are significant numbers, net profit provides the most comprehensive picture of a company's financial health. It accounts for all periodic expenses and shows how well a business manages the complete picture.

Gross profit is also significant; it tells the story of business trends in sales and production costs. As gross profits increase, this provides essential information about a company’s strength and potential growth.

However, gross profit alone is a highly inaccurate picture of a company's overall profitability and financial health since it excludes all fixed and variable costs unrelated to production and sales. Net profits, or net income, is the figure that best demonstrates how well the business is performing.

FAQs

Can a business operate successfully with low-profit margins?

Low-profit margins can be a consequence of the type of business. For example, a highly competitive market may force companies to keep prices close to the cost of manufacturing. Similarly, businesses that require high operating costs may also have lower profit margins. However, it's possible to successfully operate a business despite these challenges with careful planning and effective cost management.

What’s the significance of the net profit margin?

A net profit margin is the percentage of income your company keeps after deducting all expenses over a given period of time. It is the most direct indicator of a company's overall financial health, and therefore, investors often use it to assess whether a company is a safe investment. It also reflects how well a company's management balances its operating costs.

Is revenue the same as sales?

Revenue is similar to sales but different. Both refer to the income a company earns before subtracting expenses. However, sales result from selling goods and services to customers, while revenue can also include non-operating revenue, such as money a company generates from interest or asset sales.

How does revenue affect profit?

Profit is the remainder of income after deducting all expenses from a company’s revenue. Therefore, changes in revenue will directly impact profit. However, profit can fluctuate independently from revenue based on how efficiently a company manages expenses.