Revenue vs. Profit: What's the Difference?

• Revenue is the total quantity of income generated by the sale of goods or services related to the company's primary operations.
• Revenue, also known as "sales", does not include any operating costs or expenses.
• Profit is the quantity of income remaining after all expenses, debts, additional income streams, and operating costs have been deducted.
• While both revenue and profit refer to the amount of money a business earns, it is possible for a business to generate revenue but still incur a net loss.
• On the income statement, companies report both revenue and profit, albeit in separate sections of the report.

Revenue

Revenue is the first line of the income statement, hence it is referred to as the top line. Revenue is the amount of money earned by an organization before costs are deducted.

The amount of money a shoe store makes from the sale of its products is known as its revenue. Earnings from investments or a wholly owned subsidiary are not counted as revenue. Because it does not originate from the sale of footwear. Separate categories are used to track supplementary income and a wide range of costs.

Also, it's common practice for businesses to reveal both their gross and net income. The term "gross revenue" is used to describe a company's total sales before accounting for any refunds or price cuts. After deducting the cost of these after-sale extras, the business reaches its final tally of net sales or net revenue. Please note that net revenue does not reflect any costs incurred by the company, but rather the total revenue after deducting for any revenue-reducing factors.

What Impacts Revenue?

There are a variety of factors that can influence the amount of revenue a business can generate through its operations. If a company's goods or services are in high demand, this can result in an increase in revenue. In contrast, a decline in demand may result in a decline in revenue. Pricing is a crucial factor in determining a company's revenue, so businesses must be cognizant of what they charge. When a company sets its prices too high, it can also result in a decline in demand.

Due to external competition, a company may generate less revenue. By affecting a company's market share, competition can influence its revenue. If a company encounters intense competition, it may be required to reduce its prices or risk losing certain customers entirely.

General economic conditions also have an effect on a company's earnings. As an illustration, consumer expenditure may decline during a recession. This may also be the case for products that are seasonal, as a company may simply be at the mercy of cyclical demand (i.e. retails during the holidays).

Profit

On the income statement, profit is referred to as net income, but most people refer to it as the bottom line. Profit variances on the income statement are utilized to evaluate the performance of a company. For example, profit may appear in the contexts of gross profit and operating profit. These are the stages leading to net profit.

Gross profit equals revenue minus the direct costs directly attributable to the production of the products sold by a company (cost of goods sold, or COGS). This amount comprises both the cost of materials and direct labor used to produce a company's goods. Meanwhile, operating profit is the difference between gross profit and all other fixed and variable operating expenses, such as rent, utilities, and payroll.

What Impacts Profit?

Since profit is a component of revenue, all effects on revenue will also have an effect on profit. However, profit is affected by a greater number of variables, as there are more components involved in the calculation. To begin with, companies may experience rising COGS or other direct costs associated with producing or acquiring the products they sell. Alternatively, if the company is able to manufacture products more efficiently, this may increase profits without affecting revenue.

Companies are typically cognizant of their operating expenses, which are the costs incurred to operate the business. If a business can decrease its operating expenses, it can increase its profits without selling more products.

Companies can also be cognizant of their net profit by taking taxes and interest into account. To avoid incurring interest expense, companies may need to raise capital through the sale of equity, although this may reduce retained earnings if investors demand dividends. To avoid paying taxes, businesses must employ careful planning and legal avoidance strategies. If a company can reduce its expenses in both areas, it will ultimately increase its profit (again, without needing to generate additional revenue).

 A company can achieve record-high revenue and still report a negative profit.

Lean Startup (L)

Key Differences

When most individuals discuss a company's profit, they are referring to net income, not gross or operating profit. This is the amount remaining after expenses or net profit. Keep in mind that it is possible 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 most significant distinctions between revenue and profit is where each is reported on an income statement. Revenue is always reported at the top because it is less inclusive, while profit is always reported at the bottom because it includes expenses. Profit reflects a combination of cash inflows and outflows, whereas revenue only includes money received.

Each metric is utilized differently by businesses for decision-making. When establishing manufacturing expectations, businesses significantly rely on revenue projections, as sales forecasts are frequently the primary determinant of how much inventory to produce. Companies, on the other hand, are more concerned with profit when determining how to allocate future capital. If the company anticipates prosperous periods, it may decide to invest more heavily in growth. If not, the government may decide to build up its reserves.

Lastly, each category is affected by accounting rules, although revenue is typically a more unadulterated number that is less susceptible to variation due to accounting. When accounting for profits, management estimates and general ledger account balances may be utilized. Consequently, accounting standards may have a greater impact on profit, while market performance has a greater impact on revenue..

Companies start off by reporting revenue and finish by reporting net profit on their income statement, as was described above. There are a number of transitional stages along the journey between groups. Below, we will elaborate on the calculation and methodology used to determine net income.

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's net product sales were in the amount of 242.9 billion dollars, while its net service sales were in the amount of 271.1 billion dollars. Even if both of these figures include contra revenue accounts, such as refunds, the purpose of these accounts is to reflect only money collected prior to broader company expenses. This is the overall direction that these accounts are headed in. For this reason, even though the word "sales" is used on Amazon's financial statements, the company's total net revenue for the 12 months ended December 31, 2022 was $514.0 billion. This is despite the fact that the word "sales" is used on Amazon's financial statements.

To reach total profit from total revenue, analysts must examine the expense side of operations. According to the information provided below, Amazon spent more than $288 billion on the cost of products sold. The company incurred over $501 billion in total operating expenses, excluding taxes, interest, and other expenses.

Even though Amazon reported $514 billion in revenue, the company reported a net loss of $2.7 billion, based on the information provided above. This report emphasizes the significance of not evaluating a company's performance based solely on its revenue. Due to a company's cost structure and one-time expense implications, some businesses may report record-breaking levels of revenue despite having minimal or no net profit.

Other Related Terms

Unrealized revenue and accrued revenue are identical. Revenue earned by a company for the delivery of products or services that the customer has not yet paid for is known as "accrued revenue."

The following is a hypothetical example of accrued revenue. Let's say a company sells $5 widgets on net-30 terms to all of its customers and sells 10 widgets in August. Due to its net-30 terms, the company's customers will not be required to pay until September 30, 30 days after receiving an invoice. As a consequence, August's revenue will be considered accrued until the company receives payment from its customers.

Accounting-wise, the organization would record $50 in revenue on its income statement and $50 in accrued revenue as an asset on its balance sheet. When the company receives the $50, the cash account increases, the accrued revenue account decreases, and the $50 on the income statement remains unchanged.

 Unearned revenue and accrued revenue are not identical. They are, in fact, polar opposites.

Unearned revenue is money paid in advance by a customer for products or services that have not yet been delivered. If a company requires prepayment for its goods, it would account for the revenue as unearned and not include it in its income statement until the period in which the goods or services were delivered.

Before You Start Up

The Bottom Line

On a company's income statement, revenue and profit are two extremely essential figures. Profit is referred to as the bottom line, while revenue is referred to as the top line. When making investment decisions, investors should keep in mind that while these two figures are crucial, revenue is the amount of money a company earns before accounting for expenditures. However, when calculating a company's profit, you must account for all of its expenses, including wages, debts, taxes, and other costs.