Revenue is the total amount of money your business brings in from selling your goods or services; profit is the amount you have left over after paying bills, operating costs, and other business-related expenses.
This article will explain the difference between and formulas for calculating revenue and profit, strategies for increasing revenue and profit, and which number more accurately reflects your business’s financial health.
What is Revenue?
Revenue is the income your company makes from selling its products or services. For example, a book store’s revenue would be the income it generates from selling books or other products within the store.
Operating revenue is income generated from selling goods or services. Non-operating revenue can come from things like lawsuit proceeds, investment payouts, or the sale of assets. Non-profit organizations can receive income from fundraising campaigns, donations, and grants.
Your company can have revenue but still end up with a net loss if the cost of running the business is more than your profit.
Gross revenue is the income generated from your business, otherwise known as your company’s top line.
Net revenue is revenue minus the cost of goods and business-related expenses.
The formula for calculating revenue depends on several factors, such as your products or services, your industry, and whether you accept returns.
Revenue Formula
The basic formula to calculate revenue is:
Net revenue = (quantity sold x unit price) – discounts – allowances – returns
For example, let’s say you have a bicycle store. You sell ten bikes for $500 each, with a total revenue of $5,000. You sold one at a discount of $100, and one customer returned a bike, making your net revenue $4,400.
What is Profit?
Profit, also called net income, is how much money you have left over after paying for business expenses.
A profit margin is a ratio that shows how profitable a company is by measuring how many cents per dollar the business generates in profit. For example, if you have a 50% profit margin for the year, that means you had a net income of 50 cents for each dollar you made in revenue.
There are different types of profit, including gross profit, operating profit, and net profit.
Gross profit is profit minus the cost of goods sold. The cost of goods sold is how much it costs you to produce your goods or services. For example, the gross profit of a T-shirt design store would be the net profit minus the cost of materials (such as garments and heat press tools) and the cost of the labor required to create the T-shirts.
Operating profit is gross profit minus necessary business expenses such as payroll, insurance, and rent.
Net profit is your business’s bottom line. In accounting, the top line of a company’s income statement is its gross revenue, and the bottom line is its net profit.
You can calculate your profit by subtracting your business expenses from your total revenue.
Profit Formula
The formula for calculating profit is:
Total revenue – total expenses = profit
For instance, let’s say you have a business selling sports drinks. You sell 30,000 beverages at $3.00 a piece over the course of a year, with total revenue of $90,000. Your business expenses include taxes, marketing, label design, and the costs of developing, manufacturing, and shipping the drinks and their containers, for a total of $60,000. Your annual profit is $30,000, which is the amount of your total revenue ($90,000) minus your total expenses ($60,000).
What is the Difference Between Revenue and Profit?
The difference between revenue and profit is that revenue is the income your company brings in, and profit is the amount of money you have after paying all your business expenses. Revenue is money your business makes from selling goods; profit is what’s left after paying expenses. Let’s say you have a lemonade stand, and sell ten cups of lemonade for $1.00 a piece, earning $10.00 revenue. If your materials cost $7.00, your profit would be $3.00.
Net revenue is the amount of money you make after deducting the cost of goods and expenses directly related to generating revenue. Net profit is the amount of money you have after deducting all other business-related expenses from your revenue.
How Do You Increase Revenue?
Increasing revenue comes down to growing your business and getting more sales. While what works for one company may not work for the next, there are many strategies that can help you to increase your revenue, including:
- Marketing campaigns
- Online ads
- Social media marketing
- Hiring new salespeople
- Increasing product quality
- Raising prices
- Auditing your website
- Targeting previous customers
- Opening a new location
- Offering new goods or services
- Upselling existing products or services
- Adding more payment methods
- Providing subscriptions or SaaS
How Do You Increase Profit?
Increasing revenue can often (but not always) result in increased profits. Other methods you can use to increase your profit include:
- Surveying your target demographic
- Buying bulk or wholesale
- Paying off debts (especially high-interest debts)
- Refinancing debts at a lower interest rate
- Reorganizing staffing structure; hiring freelancers or outsourcing tasks instead of having full-time employees
Which Is a More Important Number: Revenue or Profit?
While both numbers are necessary for analyzing your company’s performance, profit is more important. Profit shows how lucrative your business is. Revenue demonstrates how much income your company generates from selling your products or services, while profit is how much money you have after paying for business expenses. You can check out more such articles on our accounting category.
FAQ
Can Profit Be Higher Than Revenue?
Profit cannot be higher than revenue. Revenue is the total amount of money your business brings in from selling its goods or services; profit is the amount you have left over after paying for the costs associated with operating your business.
