Difference Between Revenues and Profits
When looking at your small business finances, it’s important to understand the difference between revenue and profit.
You must differentiate between these terms to manage your company’s finances and create efficient budgets. Although people often use them interchangeably, income and profit are very different. Interchanging these terms can lead to critical accounting and budgeting errors. The article covers the difference between revenues and profits. Understand the concepts of revenues and profits through examples.
The main difference between revenue and profit is that revenue is cash before expenses, and profit is cash after expenses.
While income and profit are closely related, they are also very different. Understanding the differences between revenue and profit is the key to efficient accounting and budgeting practices.
Let us understand how to calculate each and why these concepts are important.
Must Read – What is Finance?
Comparison Table – Revenues vs. Profits
| Criteria |
Turnover |
Revenue |
| Definition |
Generally refers to the total volume of business conducted within a specific period. In some contexts, it can mean the rate at which inventory or assets of a business "turn over" or are replaced. |
Represents the total income generated by selling goods or services related to the company's primary operations. |
| Formula |
Revenue = Quantity x Sales Price |
Profit = Income – Expenses |
| Calculation |
Depending on context, calculated as sales or the cost of goods sold divided by average inventory or total sales. |
Calculated as the sum of money received from sales of products or services before any expenses are subtracted. |
| Purpose/Use |
Used to measure the efficiency of a company in using its assets, especially inventory, and can also indicate the scale of a company's operations. |
Used to evaluate a company's overall income, forming the basis for various financial analyses and business strategies. |
| Indicative of |
In the context of inventory, it indicates how quickly a company can convert its products into sales. High turnover may indicate efficient operations. |
Indicates the earning potential of a business and is a key figure for assessing its financial health and growth potential. |
| Impact on Financial Statements |
Affects the balance sheet and, indirectly, the income statement through the cost of goods sold. |
Directly affects the income statement as it is the top line from which all expenses are subtracted to determine net income. |
| Variability |
Varies significantly based on the type of industry and business model. |
Generally more consistent, reflecting ongoing sales activities. |
| Considerations |
High turnover might not always be positive, as it could indicate low inventory levels leading to stockouts. |
Revenue growth is often a key indicator of market acceptance and business scalability. |
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Difference Between Revenues and Profits
- Revenue and profit are two different metrics of a company’s finances. These numbers can be used to judge the success or failure of your business or any other.
- The revenue is the top line, and a company’s profit is the bottom line.
- While revenue and profit refer to the money a business makes, a business can earn revenue but still have a net loss.
Income and earnings can fluctuate significantly depending on circumstances. Suppose a company has unusually high sales at the end of the year (due to holiday shopping). In that case, the income will be higher than usual.
The same applies to companies that cut costs or lower their expenses during certain months. Their profits will increase compared to other periods because they are not spending as much on labor or other resources.
Read LaterWhat is Revenue?
Revenue refers to the money that comes into a business from regular business activities, such as selling goods and services to customers. Revenue is also known as sales on the income statement.
In simple terms, income is all the cash your business generates before expenses are subtracted. It is the amount your company receives in exchange for goods or services.
The term generally refers to sales revenue, although it can also include things like rental or interest income. However, these sources of income are generally accounted for separately.
Revenue = Sales (quantity sold) x Average Price of Service or Sales Price
Example of Revenue Calculation
To calculate sales, multiply the price of goods or services by the amount sold. For example, you sell 100 pies at Rs. 80 each. Your pie sales would be –
=> 100 x 80 = Rs. 8000
Types of Revenue
There are four main types of revenue-
- Operating Revenue – The amount a business earns from its normal activities. They include sales of goods or services, loan interest, and rental income.
- Investment Revenue – Investment income is money earned from investing activities, such as interest on bonds and stock dividends.
- Debt Revenue – Debt income is money earned from loans, such as interest on loans.
- Capital Revenue – Capital income is money earned from property, such as stock dividends.
What is a Profit?
Profit is the amount that remains after accounting for all expenses, debt, additional income streams, and operating costs. In other words, it’s what’s left after all income deductions are applied.
There are several types of earnings calculated during the financial reporting process. Still, several measures of profitability help investors gain insight into the overall financial health of a company.
Profit = Selling Price – Cost Price
Example of Profit Calculation
Preparing one pie costs Rs 20, and you sell 100 pies at Rs. 80 each.
The revenues generated from pies – (80 x 100 = Rs. 8000)
The costs involved – (20 x 100 = Rs. 2000)
Your sales profit would be –
=> 8000 – 2000 = Rs. 6000
Types of Profits
There are three types of Profit:
- Gross profit: Total sales minus cost of goods sold.
- Operating profit: Gross profit minus your operating expenses. An expense that a company incurs through its normal business operations.
- Net profit: Remaining income after all costs, expenses and deductions.
The most common way to calculate your small business profit (net profit) is using the formula:
Net profit = Revenues – Expenses.
If you think you want to learn things in a more interesting way, watch these videos explaining the concepts of revenues and profits in the most interactive manner.
Source - Rask Australia
Grow Your Revenues and Increase Your Profits
Your earnings and revenue are important indicators that can tell you about the financial health of your small business. You can use these numbers to determine the price of your products and services, create your annual budget, and much more.
Your business will be one step closer to success by understanding the difference between revenues and profits, why they’re important, and how to calculate them.
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