Revenue vs. Profit: An Overview
Revenue is the total amount of income generated by the sale of goods or services related to the company's primary operations. Profit,which is typicallycalled net profitor thebottom line,isthe amount of income that remains after accounting for all expenses, debts, additional income streams, and operating costs.
- Revenue is the total amount of income generated by the sale of goods or services related to the company's primary operations.
- Revenue, also known simply as "sales", does not deduct any costs or expenses associated with operating the business.
- Profitisthe amount of income that remains after accounting for all expenses, debts, additional income streams, and operating costs.
- While revenue and profit both refer to money a company earns, it'spossible for a company to generate revenue but have a net loss.
- Companies report both revenue and profit on its income statement, though it is reported on different areas of the report.
What Is The Difference Between Revenue And Profit?
Revenueis often referred to as thetop linebecause it sits at the topof theincome statement. Revenueisthe income a company generates before any expenses are subtracted.
Imagine a shoe retailer makes from selling its shoes before accounting for any expenses is its revenue. Income isn't considered revenue if the company also has income from investments ora subsidiary company. That's because it doesn't come from the sale of shoes. Additional income streams and various types of expenses are accounted for separately.
In addition, companies often report gross revenue and/or net revenue. Gross revenue is all of the sales a company makes prior to any returns or pricing discounts. Once these residual sale items are accounted for, the company then reports net sales or net revenue. Bear in mind that net revenue does not include company expenses; it only reports the aggregated revenue factoring in certain aspects of revenue that may reduce the amount.
What Impacts Revenue?
There are many factors that may impact the revenue a company is able to bring in as part of its operations. If a company's products or services are in high demand, it can lead to an increase in revenue. Conversely, if there is a decrease in demand, it can lead to a decrease in revenue. Companies must be sensitive to what they charge, as pricing is a crucial factor in determining a company's revenue. If a company sets its prices too high, it can also lead to a decrease in demand.
A company may earn less revenue based on external competition. Competition can impact a company's revenue by affecting its market share. If a company faces intense competition, it may have to lower its prices or risk missing out of certain customers altogether.
The revenue a company earns is also impacted by general economic conditions. During a recession, for example, consumer spending may decrease. This may also be the case for products that are seasonal, as a company may simply be at the whim of cyclical demand (i.e. retails during the holidays).
Profit is referred to as net incomeon the income statement, and most people know it as the bottom line. There are variations of profit on the income statement that are used to analyze the performance of a company. For instance, the term profit may emerge in the context of gross profit and operating profit. These are steps on the way to net profit.
Gross profit is revenue minus the cost of goods sold (COGS), which arethe direct costs attributable to the production of the goods sold in a company. This amount includes the cost of the materials used in creating a company's products along with the direct labor costs used to produce them. Meanwhile, operating profitis gross profit minus all other fixed and variable expenses associated with operating the business, such as rent, utilities, and payroll.
What Impacts Profit?
Since profit is a component of revenue, all of the impacts to revenue also impact profit. However, profit is impacted by more factors as there are more items involved in the calculation. For starters, companies may have escalating costs for COGS or other direct costs associated with producing or purchasing the products it sells. On the other hand, should the company be able to manufacture goods more efficiently, this may increase profit without impacting revenue.
Companies are also usually mindful of operating expenses, and these costs are the expenses that a company incurs to run its business. If a company can reduce its operating expenses, it can increase its profits without having to sell any additional goods.
Companies can also be mindful of net profit by considering taxes and interest. To avoid interest expense, companies may need to raise capital by offering equity, though this may detract from retained earnings in the long run if investors demand dividends. To avoid taxes, companies must deploy considerate planning and implement legal avoidance strategies. If a company can be mindful to both, it would reduce its expenses in both areas and ultimately increase profit (again, without having to earn any additional revenue).
A company can earn record-high revenue and still report a negative profit.
When most people refer to a company's profit, they are not referring to gross or operating profit, but rathernet income. This is what's left over after expenses or the net profit.Keep in mind that it ispossible for a company to generate revenue but have a net loss at the same time (which we'll see in the Amazon example below).
One of the primary differences between revenue and profit is where each number is reported on a company's income statement. Revenue is always reported towards the top as it is less inclusive; meanwhile, profit is always further down as it incorporates expenses. This leads to another key difference: revenue only incorporates the money taken in, while profit reflects a combination of inflows and outflows.
Companies use each metric differently to make decisions. Companies use revenue projections heavily when setting manufacturing expectations as companies often use forecasted quantities of goods sold as the main driver to what inventory to make. On the other hand, companies are more interested in profit when deciding how best to allocate future capital. If the company expects strong periods of profit, it may decide to invest heavier into growth. If not, it may decide to build its reserves.
Last, each category is influenced by accounting rules, though revenue is often a more pure number less susceptible to variation due to bookkeeping. When accounting for profit, there may be reliance on management estimates and more general ledger account balances. Therefore, profit may be more impacted by accounting rules, whereas revenue is generally more influenced by market performance.
Is reported towards the top of the income statement(Video) The Difference Between Revenue & Profit Explained
Incorporates only inflows (to a large degree)
Is often used by management to set manufacturing targets (based on projected units sold)
Is often less impacted by accounting rules and standards
Is reported throughout and at the bottom of the income statement
Incorporates inflows and outflows
Is used by management to forecast how to spend future capital
May be more impacted by accounting rules
Calculating Revenue to Profit
As mentioned above, companies begin their income statement reporting revenue and end it reporting net profit. Along the way, there are several steps to get from one category to the other. The formula for calculating net income and each step in the process is further explained below.
Net Profit = (Net) Revenue - Cost of Goods Sold - Operating Expenses - Interest Expenses - Taxes
Step 1: Calculate Net Revenue. This step entails gather all revenue sources and factoring in all appropriate items that directly reduce gross revenue such as returns.
Step 2: Calculate the Cost of Goods Sold (COGS). COGS is the cost of producing or purchasing the products that were sold during the period. It includes the cost of materials, labor, and other direct costs. These expenses are only attributable to creating inventory to be sold and do not include administrative costs more geared towards operating a business.
Step 3: Calculate Gross Profit. Subtracting the COGS from gross sales gives you the gross profit.
Step 4: Calculate Operating Expenses. Operating expenses are the expenses incurred to run the business such as rent, utilities, salaries, marketing expenses, and taxes. Again, these are the costs needed to run the business but not necessarily correlated to the production of a specific good that is sold.
Step 5: Calculate the Operating Profit. Deduct the operating expenses from the gross profit to arrive at the operating profit.
Step 6: Calculate Interest and Taxes. Interest and taxes are two expenses that are usually not included as operating expenses. Instead, they are reported below operating profit but are still included when calculating net profit or net income.
Step 7: Calculate Net Profit. Deduct the interest expenses and taxes paid during the period from the operating profit to arrive at the net income.
Example of Revenue vs.Profit
In February 2023, Amazon.com reported its fiscal year 2022 results. The company generated $242.9 billion of net product sales and $271.1 billion of net service sales. Though both of these amounts include contra revenue accounts such as returns, the general direction of these accounts is to report only money earned prior to broader company expenses. For this reason, even though the word "sales" is used on Amazon's financial statements, the company's total net revenue was $514.0 billion for the 12 months ending Dec. 31, 2022.
To bridge from total revenue to total profit, analysts must review the expense side of operations. From the data below, Amazon spent over $288 billion on the cost of goods sold. In total, the company had over $501 billion of total operating expenses omitting expenses such as taxes, interest, or other expenses.
Based on the information above, although Amazon reported $514 billion of revenue, the company did not earn a profit as the company reported a net loss of $2.7 billion. This report highlights the importance of not judging a company's performance solely on the company's revenue. Because the cost structure and one-time expense implications to a company, some companies may report record-levels of revenue though have minimal or no net positive profit.
Other Related Terms
Accrued revenue is the same as unrealized revenue. Accrued revenue is the revenue earned by a company for the delivery of goods or services that have yet to be paid for by the customer.
Here's a hypothetical example to demonstrate accrued revenue. Let's say acompany sells widgets for $5 eachon net-30 terms to all of its customersand sells 10 widgets in August. Since it invoices its customers on net-30 terms, the company's customers won't have to pay until 30 days later, or on Sept. 30. As a result,August's revenue will be considered accrued revenue until the company receives payment from its customers.
From an accounting standpoint, the company would recognize $50 in revenue on itsincome statementand $50 in accrued revenue as an asset on itsbalance sheet. When the company collects the $50, the cash account on the income statement increases, the accrued revenue account decreases, and the $50 on the income statement remains unchanged.
Accrued revenue is not the same as unearned revenue. In fact, they're actually the opposite of one another.
Unearned revenue accounts for money prepaid by a customer for goods or services that have not been delivered. If a company requires prepayment for its goods, it would recognize the revenue as unearned, and would not recognize the revenue on its income statement until the period for which the goods or services were delivered.
Can Profit Be Higher Than Revenue?
Revenue sits at the top of a company's income statement, making it the top line. Profit, on the other hand, is referred to as the bottom line. Profit is lower than revenue because expenses and liabilities are deducted.
Is Revenue the Same As Sales?
Revenue is commonly referred to as sales. But revenue is any income a company generates before expenses are subtracted while sales are what the firm earns from selling goods and services to its customers.
What Is More Important, Profit or Revenue?
While both are important, profit gives a more accurate picture of a company's financial position. That's because a company's liabilities and other expenses such as payroll are already accounted for when its profit is calculated.
How Much of Revenue Is Profit?
Profit is whatever remains from the revenue after a company accounts for expenses, debts, additional income, and operating costs.
The Bottom Line
Revenue and profit are two very important figures that show up on a company's income statement. While revenue is called the top line, a company's profit is referred to as the bottom line. Investors should remember that while these two figures are very important to look at when making their investment decisions, revenue is the income a firm makes without taking expenses into account. But when determining its profit, you account for all the expenses a company has including wages, debts, taxes, and other expenses.
Revenue is the total amount of income generated by the sale of goods or services related to the company's primary operations. Profit, which is typically called net profit or the bottom line, is the amount of income that remains after accounting for all expenses, debts, additional income streams, and operating costs.Can profit be higher than revenue? ›
Since profit is calculated by taking expenses from revenue, you can never have a higher profit than revenue. In math terms, you would have to have a negative amount of expenses, which wouldn't be expenses.What matters more profit or revenue? ›
Revenue is about doing more and profitability is more about doing it with less. Growth often requires companies to make significant upfront investments prior to any revenue generation. While this initially impacts profitability, effective execution will generate future sales.What is the difference between profit and revenue quizlet? ›
Revenue is the total amount producers receive after selling a good. Profit is the total amount producers earn after subtracting the production costs.What is the difference between profit and revenue use equations in your explanation? ›
Profit is the result of deducting expenses from the revenue. On the other hand, we can calculate revenue by multiplying the number of goods sold with the selling price per unit.
Higher Profit Doesn't Always Mean Higher Revenue
Profit is the amount left over after paying all expenses, while revenue is the total amount made before deducting any expenses. Therefore, a company can have higher profits but lower revenue if its cost base is high relative to their turnover.
Profit margins, which are computed as net income divided by revenue, do not always improve when sales are increased or costs are reduced. Increasing revenue can result in higher costs and lower profit margins. Cutting costs can result in diminished sales and also lower profit margins if market share is lost over time.Should I focus on revenue or profit? ›
The primary mission of a business should be long-term profitability not just revenue growth. “Profitability is a measurement of efficiency.” It ultimately is the deciding factor in the success or failure of a business.Should you focus on profits or revenue why? ›
Profit is the lifeblood of any business. Without profit, a business can quickly spiral out of financial control. A good handle on profit and finding ways to increase it should be one of the primary focuses for all business owners.What percentage of revenue should be profit? ›
An NYU report on U.S. margins revealed the average net profit margin is 7.71% across different industries. But that doesn't mean your ideal profit margin will align with this number. As a rule of thumb, 5% is a low margin, 10% is a healthy margin, and 20% is a high margin.
Revenue is at the top of the income statement because it's the beginning of all calculations — money in from goods or services sold. As we mentioned in point one above, without revenue, you can't have profit (even with revenue, you're not guaranteed profit).What is the difference between profit and revenue example? ›
Though revenue is the income produced before costs, profit is the income earned that is left in the wake of deducting all costs. Costs or expenses can incorporate anything from taxes to inventory costs. It's additionally called the net income or bottom line. At last, profit is a piece of a business's income.What is the main difference between revenue profit and income? ›
The actual amount received by the company through its business activities without any deduction is known as revenue. The surplus remained after reducing all expenses from the revenue is known as profit. The actual earnings of the company during a particular accounting year is known as income.What is revenue and profit function? ›
Examples; wages of production staff, raw materials The revenue function, R(x), is the total revenue realized from the sale of x units of the product. The profit function, P(x), is the total profit realized from the manufacturing and sale of the x units of product.What is the difference between revenue and profit Wikipedia? ›
Profits or net income generally imply total revenue minus total expenses in a given period. In accounting, revenue is a subsection of the Equity section of the balance statement, since it increases equity. It is often referred to as the "top line" due to its position at the very top of the income statement.How is profit determined? ›
Profit is simply total revenue minus total expenses. It tells you how much your business earned after costs.How can revenue be less than profit? ›
Profit on the income statement
Net revenue only considers expenses directly tied to revenue. In contrast, net profit further reduces revenue by deducting all other fixed and variable costs such as payroll, rent, insurance, supplies, utilities, and maintenance.
Profit margin is a financial ratio that measures the percentage of profit earned by a company in relation to its revenue. Expressed as a percentage, it indicates how much profit the company makes for every dollar of revenue generated.Can profit be over 100%? ›
The higher the price and the lower the cost, the higher the Profit Margin. In any case, your Profit Margin can never exceed 100 percent, which only happens if you're able to sell something that cost you nothing.What is the ratio between revenues and profits? ›
The net profit margin is the ratio of net profits to revenues for a company or business segment. Expressed as a percentage, the net profit margin shows how much of each dollar collected by a company as revenue translates to profit.