The words “revenue” and “profit” are often loosely interchanged in casual conversations: both refer to money earned. However, if you are managing a business or planning to build one, whether big or small, it is important to learn the difference between the two.
Revenue, also called “rev” or simply “sales,” is generally the total amount of money that comes from the sale of products or services in a business. It is usually written as the topmost item on an income statement.
Revenue is a positive cash inflow. It comes from all sources of income, from both business and non-business operations. Items that can be added to the revenue are liquid cash, dividends, checks, capital gains, credit card gains, royalties, auctioned and appreciating assets, sales from obsolete equipment, and investment income. These items are usually written under the heading “Accounts Receivable.” For instance, if you are a small business owner who sells handmade bags, any amount of money you receive from the sales of your bags will be part of your revenue. If a total of 500 bags were purchased this year for $100 each, $50,000 is your revenue.
It is important to note, however, that other entities get their revenue from different sources. For example, the government gets its revenue from sources such as tax, inter-governmental grants, fees, fines, resource rights, security sales, etc. For non-profit organizations, revenue includes all donations from individuals, companies, government, and money from membership fees and fundraising activities.
On the other hand, profit is generally the amount of money left after the expenses are subtracted from your revenue. It is usually the bottom item on the statement of account.
However, calculating the profit is not easy as revenue minus expenses.To better understand how your business is doing, you need to determine the following:
1. Gross profit – this is calculated by deducting the cost of producing the goods and services from the total revenue. This helps you determine if your production is efficient and that your pricing is appropriate. For instance, you sold 500 handmade bags for a total of $50,000, but it cost you $20,000 to make them. Your gross profit is $30,000 ($50,000 – $20,000).
2. Net profit – this is the gross profit minus the fixed and variable expenses incurred in running the business. This helps you determine the amount of money you still have to invest in your business. For instance, your gross profit is $30,000. You paid $3,000 for the utilities, $10,000 for the labor, and $7,000 for the store rental. Your net profit is $10,000 ($30,000 – $3,000 – $10,000 – $7,000).
Revenue vs Profit
What, then, is the difference between revenue and profit?
Revenue is the first item on the account statement. It represents the total amount of money received from the sales of your products and services and can be in a form of liquid cash, dividends, checks, capital gains, credit card gains, royalties, auctioned and appreciating assets, sales from obsolete equipment, and investment income. It basically tells you the total sales or how much money you earned.
Conversely, profit is, in a nutshell, the last item on your account statement. It represents the money left once your expenses are deducted from your revenue. Profit can mean gross profit, which is your revenue minus the production cost of your goods and services, or net profit, which is the gross profit minus the fixed and variable expenses in running your business. Profit helps you determine the money you have left for further investments and if your production and pricing meet the business demands.
|Represents the total amount of money received from the sales of your products and services; sometimes referred to as “sales” or “rev”||Represents the amount of money left after expenses are deducted from the revenue; can be gross profit (revenue minus production cost) or net profit (gross profit minus fixed and variable expenses)|
|The first line item on the statement of account||The last line item on the statement of account|
|Helps you determine the total sales or money earned||Gross profit can help you determine if your current production is efficient and if you are pricing your products correctly; net profit tells you the amount of money you have left for business investments|