If you’re a small business owner, you know the importance of tracking fluctuations in revenue vs. profit. It gives you important information about your business, and helps you project potential for growth in the future.
But, since these terms are often used together, , you may not understand the true difference in revenue vs. profit. For example, does revenue include costs of materials? Is revenue before or after expenses? In this article, we’ll take a close look at both terms to help you get a clearer understanding of each and the key differences between them so you can more easily evaluate these important business metrics.
The basics of profit vs. revenue
If you’re going to gain a better understanding of the relationship between profit vs. revenue, you’ve first got to cover the basics. So, what do each of these terms mean, and how can they inform your understanding of your business?
- Revenue: This metric represents a business’s total generated income through the goods they sell or the services they provide, without consideration of all the costs involved in getting there.
- Profit: This metric is your business’s net income—the amount of money you’ve earned after taking into account your expenses for the month or year.
While the numbers are both telling you information about your income, there are important differences between the two that you need to keep in mind when evaluating your income statements.
The 4 differences between revenue and profit
Now that we’ve got a foundational understanding of these two terms, let’s take a closer look at the key distinctions between revenue and profit, why these differences matter, and what the different numbers can tell you about the state of your business.
Revenue is the total amount of money coming into your business through the sale of goods and services, as well as any other income-generating activities that may be included in your business model based on your industry and expertise. It’s also referred to as “net sales” in some instances. Here are four key factors to consider when it comes to revenue vs. profit:
- Formula: In order to calculate your business’s average revenue, simply multiply the total number of sales by the average cost of goods or services. In practice, this means you’re looking at the number of units sold and the sale price, minus any returns or refunds made.
- Variations: Revenue is generally broken up into two different categories—operating revenue and non-operating revenue.
- Operating revenue is all income generated by core business activities, like selling a product or providing a service to your client or customer.
- Non-operating revenue is income generated outside of your core business operations. This might include interest earned on your savings accounts or one-time earnings, like the sale of equipment you’ve decided to phase out of your operation.
- Location on income statement: Revenue is often referred to as a business’s “top line.” When looking at an income statement, you’ll find it at the top of the summary information, representing the total sum of all the money coming into your business—your net sales.
- Significance: Revenue represents the demand for your goods and services—how many people are finding your business and identifying a need for it in their lives? By examining your revenue, you may decide you need to boost or shift your marketing efforts, reexamine how you’re making a product you’re selling, or adjust the scope of a service to better meet the needs of your intended audience. Or perhaps you’re thrilled with your revenue! There’s no need to be overly critical here—use this number to gauge your satisfaction with your business goals.
Profit represents the total amount earned after accounting for the cost of materials, marketing, taxes, and any other operational expenses associated with your business. In short, profit is the amount of revenue left after subtracting all business expenses—the true amount you’ve earned. Here are some of the key factors to consider when it comes to profit:
- Formula: In order to calculate your business’s profit, simply take your revenue and subtract the expenses your business has accrued in the same period.
- Variations: There are three types of profit commonly monitored in business—gross profit, operating profit, and net profit.
- Gross profit is the result of subtracting the total cost of goods sold from total revenue.
- Operating profit subtracts operating expenses, including overhead and accounting fees, in addition to the cost of goods sold. Sometimes operating profit is referred to as “earnings before interest and taxes.”
- Net profit goes one step further, also subtracting interest and taxes. This is also referred to as your “bottom line”—the true representation of what you’ve earned in a given period.
- Location on income statement: As the above-mentioned nickname indicated, the bottom line is located at the bottom of your income statement. Depending on how detailed your statement is, you may see the net, operating, and gross profit broken out or just net profit.
- Significance: The bottom line represents exactly how much your business is growing or advancing in a given period of time. Depending on your business goals, your profits may be useful in paying off loans, funding new projects or research into developing your services, or they could be invested into another area of your business. A growing bottom line shows growth, while a shrinking bottom line indicates you may be losing revenue or increasing your regular expenses.
Your business’s revenue and profit numbers may be quite similar or dramatically different—there is no right or wrong ratio, especially as you work to build your business and establish yourself in your chosen industry. Every business is different and must be evaluated within its own unique, holistic context. However, by monitoring and tracking revenue and profit, you’ll be able to track your business’s growth. For example, decreasing revenue may inspire you to reexamine marketing efforts, and a dramatic difference in revenue and profit numbers may call for cutting expenses in your operation.
Choose a bank that knows how to serve you
If you’re running a small business, it’s important that you partner with a bank that understands the unique challenges you face and makes it easy to manage your finances. At NorthOne, we do just that.
Our small business banking accounts are designed to provide the tools business owners need., including tracking revenue vs. profit so you can make informed decisions about the future of your company. And if you have a question or concern about your account? Our helpful staff is here to provide instant support via chat, phone, or email.
NorthOne’s accounts help you take control of your business expenses and position your company for the future. Visit us online to learn about our small business banking options.