Revenue is the total income a business earns from sales of products and services. Profit, on the other hand, is the amount left from your revenue after you have deducted all expenses. Simply put, revenue is also known as your sales, while profit refers to your bottom line.
Both profit and revenue refer to the money a business earns, but there is a significant difference between the two. Let’s take a closer look.
Revenue is also called the top line as it is in the first entry of your income statement. It is also your total sales for a certain time period before any expenses are taken out.
While revenue refers to income or money your business earns from sales, not all cash inflow is considered revenue. Additional income from other sources like investments or subsidiary companies is not considered revenue.
There are also special kinds of revenue. Accrued revenue refers to unrealized revenue or money earned from the delivery of goods and services that has not been paid yet by the customer. Unearned revenue on the other hand refers to money prepaid by customers for goods and services that your business has not yet delivered.
In terms of accounting, accrued revenue is recognized on the income statement as an asset on the balance sheet in the period the goods and services are delivered. On the other hand, unearned revenue is not recognized in the income state during the period of payment. It will only be recognized on the income statement in the period the company delivers the goods and services.
Profit refers to the amount that is left of your revenue after deducting your expenses. There are various levels of profit that are reflected in your income statement, but ultimately, the most important level is your bottom line or net income. These different levels of profit and profit margins are useful tools for analyzing your business’s performance and success.
In between your top line and bottom line, you will encounter your gross profit and operating profit.
Gross profit is your revenue minus the costs that are directly attributable to the production of goods and services of your business. These account for variable costs depending on the level of output, including raw materials and labor expenses.
Operating profit is your gross profit minus all other fixed and variable expenses that are not directly involved in goods and services production, but are necessary to keep business operations running. Such expenses include rent, utilities, and payroll.
Net profit is your company’s bottom line. This takes into account other costs, additional lines of income, taxes, and special one-time, unexpected, or circumstantial expenses. It is also the amount of money you get to take home from your business’s dealings.
As a business owner, your goal is to make sales that translate into profit. There are instances where a company generates revenue but suffers a net loss. When this happens, it means in the period of time it took for you to generate your revenue, it still failed to cover all your expenses.
While increasing revenue is important, it is not always an assurance that your business earned profit from your sales. At the end of the day, your focus should be making more profit from your revenue.