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Revenue vs. Profit: What’s the difference?

January 16, 2023
Running your own successful small business means never taking your eye off the bottom line — but it’s critical to not lose sight of the top line, either.Revenue (the top line) and profit (the bottom line) are two of the most important metrics on a financial statement for both business owners and investors to understand the health of a business and whether it’s heading in the right direction. While revenue can show potential, your company’s profit is a much clearer indicator of whether your firm is operating efficiently.In this article, we’ll outline the difference between revenue and profit, provide clear definitions of the variants of revenue vs profit you would see listed on your company’s income statement and explain how they are calculated.

What is revenue?

Displayed as the top number or line on a business’ profit and loss statement, a company’s revenue is all earnings before interest and taxes. Otherwise known as a company’s gross sales, revenue is a key measure of business growth, as companies tend to grow by increasing revenue.While revenue does describe income generated through sales, it also takes income from general business operations into consideration, such as income from dividends, royalties and interest.Revenue is not only impacted by the price of a product or a service, but also by the number of units sold. Discounts can increase sales but result in lower revenue, depending on how many units are sold at the lower price.However, seasonal surges in demand or successful marketing campaigns can increase revenue if higher numbers of units are sold without any price reduction. Many businesses measure the success of marketing efforts or promotions by evaluating the impact on revenue.Note: Revenue can’t give you the lowdown on the financial health of a business by itself. However, revenue trends of a business can be used to measure growth, compare your business to others and carry out other important analysis. This is why it pays to know your revenue numbers.

Types of revenue

Revenue vs operating income

As the top line number, revenue is the starting point for calculating profit. After subtracting the cost of goods sold (COGS) and operating costs from your business’s revenue, the amount you have left over becomes your operating income. Businesses may also split revenue into two separate categories: operating revenue and non-operating revenue, depending on whether it has come from core business operations or another area of business activity.It’s important to get familiar with the different types of revenue out there and how they’re calculated. This is especially the case for gross revenue and net revenue, as any confusion could impact your tax liabilities if not calculated correctly.

Total revenue

Total revenue describes any income that comes into the business, irrespective of its source. With this in mind, any revenue generated from gross sales, investments, interest and royalties counts towards your total revenue.Understanding how to calculate total revenue will give you the insights you need to analyse the relationship between your customer and your pricing.The calculation for total revenue is very straightforward:Total Revenue = Price x Quantity Sold

Gross revenue

Also known as gross income, gross revenue is the sum of all money generated by a business before expenses are deducted. As such, gross revenue includes income generated from the sale of goods and services, interest, sale of shares, exchange rates and sales of property and equipment.

Sales revenue

Unlike gross revenue, sales revenue is calculated solely from the total sales of your goods and services without taking into account any income generated from other revenue streams.For instance, if your business manufactures shoes and you sell 500 pairs of shoes at £50 each, your sales revenue would be £25,000.

Net revenue

Your net revenue offers a more accurate reflection of your business’s health, as it’s the difference between gross revenue and expenses directly related to it.For example, if your company manufactures the products it sells, your gross revenue is equal to your total sales. From this, the cost of goods sold is then deducted, and includes costs such as:
    raw materialsproduction costsselling expenses (e.g. commission and discounts)
The difference between gross revenue and the cost of goods is net revenue.Going back to the shoe-making business, if each pair of £50 shoes cost you £20 to manufacture, your net revenue would be:£50 (selling price) - £20 (cost of goods) = £30 (net revenue)

Benefits of calculating your revenue

    Can help ensure your business remains profitable by identifying any future opportunities for growth. With this in mind, any mistakes made in your calculations can cause trouble for your accounting and bookkeeping practices further down the line.Planning for the future. Understanding your revenue streams can also help you to better plan for short-term and future operating expenses, such as total stock, employee salaries or paying suppliers. You can also get a better sense of how much you can invest into research and development, or upgrading equipment.Decide how to price your product. Analysing your revenue can help you recognise if you’re charging too much or too little for your product or service, as well as the impact on your gross profit margin.

Revenue vs profit: Key differences

While revenue refers to the amount of money a business generates, profit is the total amount a business keeps after all its expenses have been deducted. It’s worth noting that a business may generate significant revenue, yet make a net loss if business expenses exceed revenue.One of clearest ways to understand when each term is used is to view a typical income statement or profit and loss statement, where income vs revenue vs profit is clearly laid out and defined.

Types of profit

Net profit

Often referred to as net profit or net income, this number is quite literally the bottom line, as it appears on the last line on an income statement.Net profit represents the income remaining after your total expenses are subtracted from net revenue.While net revenue only considers expenses directly tied to revenue, net profit further reduces revenue by deducting all other fixed and variable costs, such as payroll, depreciation, supplies, utilities and maintenance.Any remaining amount of revenue remaining after deducting expenses is your net profit, and any shortfall is classed as a net loss.The formula to use to calculate net profit is:Gross profit – operating expenses – tax = net profit

Gross profit

Another key number, gross profit gives the picture of business trends in sales and production costs. Also known as top-line growth, gross profit increase provides important information about how fast a business is growing, as well as opportunities for potential growth. However, gross profit should not be considered on its own, as it excludes all fixed and variable costs not relating to production and sales.The following formula is used to calculate gross profit:Revenue – Cost of sales = Gross profit

Operating profit

One further number you may see on an income statement is operating profit.  This refers to the money your business has left once all business costs have been paid, but tax hasn’t yet been deducted. An operating profit will show that your business is able to generate more money than it spends.Operating profit can be calculated as follows:Gross profit – Operating expenses (excluding tax) = Operating profit

Revenue vs profit: Which is the most important?

While revenue is an important number, net profit provides the most comprehensive picture of a business’ overall financial health, as it takes your total income and total expenses into account.Gross profit is also significant, as it shows business trends with sales and production costs. Top-line growth also provides key information about your business’s strength, as well as potential for growth.However, you shouldn’t look at gross profit alone to determine how profitable a company is overall because it excludes all fixed and variable costs that aren’t related to production and sales. With this in mind, net income is the best indicator for how well a business is doing.

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