Revenue vs. Profit: An Overview
Revenue is the total amount of income generated by the sale of goods or services related to a company's primary operations. Profitisthe amount of income that remains after accounting for all expenses, debts, additional income streams, and operating costs. Profit is typicallyreferred to as net profitor thebottom line,
Key Takeaways
- Revenue is the total amount of income generated by the sale of goods or services related to a company's primary operations.
- Revenue, also known simply as "sales", doesn't 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.
- Revenue and profit both refer to money a company earns but a company can generate revenue and still have a net loss.
- Companies report both revenue and profit on their income statement but they're recorded in different areas of the report.
What Is Revenue?
Revenueis often referred to as thetop linebecause it appears at the topof theincome statement. It'sthe income that a company generates before any expenses are subtracted. Income from sales and operations isn't considered revenue if the company also has income from investments ora subsidiary company. Additional income streams and various types of expenses are accounted for separately.
Companies often report gross revenue and/or net revenue. Gross revenue is the total of sales a company makes before any returns or pricing discounts. The company then reports net sales or net revenue when these residual sale items are accounted for.
Net revenue doesn't include company expenses. It only reports the aggregated revenue factoring in certain aspects of revenue that may reduce the amount.
What Impacts Revenue?
Many factors can impact the revenue a company brings in as part of its operations. It can lead to an increase in revenue if a company's products or services are in high demand. It can lead to a decrease in revenue if there's a decrease in demand. Companies must be sensitive to what they charge because pricing is a crucial factor in determining a company's revenue. It can also lead to a decrease in demand if a company sets its prices too high.
A company may earn less revenue based on external competition which can impact its revenue by affecting its market share. A company may have to lower its prices or risk missing out on certain customers altogether if it faces intense competition.
The revenue a company earns is also impacted by general economic conditions. Consumer spending may decrease during a recession. This can also be the case for products that are seasonal because a company may simply be at the whim of cyclical demand such as retails during the holidays.
What Is Profit?
Profit is referred to as net incomeon the income statement. Most people know it as the bottom line. Variations of profit on the income statement are used to analyze the performance of a company. The term profit may emerge in the context of gross profit and operating profit.
Gross profit is revenue minus the cost of goods sold (COGS), which arethe direct costs attributable to the production of the goods sold by a company. This amount includes the cost of the materials that are used in creating a company's products along with the direct labor costs used to produce them.
Operating profitis gross profit minus all other fixed and variable expenses associated with operating the business such as rent, utilities, and payroll.
A company can earn record-high revenue and still report a negative profit.
What Impacts Profit?
Profit is a component of revenue so all impacts to revenue also impact profit. Profit is impacted by more factors, however, because there are more items involved in the calculation. Companies may have escalating costs for COGS or other direct costs associated with producing or purchasing the products they sell. It may increase profit without impacting revenue, however, if the company can manufacture its goods more efficiently.
Companies are also usually mindful of operating expenses. These are the expenses that a company incurs to run its business. It can increase its profits without having to sell any additional goods if the company can reduce its operating expenses.
Companies can also be mindful of net profit by considering taxes and interest. Companies may have to raise capital by offering equity to avoid interest expenses but this can detract from retained earnings in the long run if investors demand dividends.
Companies must do considerable planning and they must implement legal avoidance strategies to avoid taxes. A company would reduce its expenses in both areas and ultimately increase profit if it were mindful of both, again without having to earn any additional revenue.
Key Differences Between Revenue and Profit
Revenue
Money a business earns from operations.
Reported near the top of the income statement
Companies rely more heavily on revenue projections when setting expectations.
Often less susceptible to bookkeeping variations and is usually a purer number.
Profit
Money a business keeps after deducting expenses.
Reported further down the page of the income statement
Companies rely more heavily on profit when deciding how to allocate future capital.
Profit projections may rely more heavily on management projections.
Most people aren't referring to gross or operating profit when they refer to a company's profit. They're referring to net income: what's left over after expenses or the net profit.A company can generate revenue but have a net loss at the same time.
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 toward the top because it's less inclusive. Profit is always further down because it incorporates expenses. This leads to another key difference: Revenue only incorporates money that's taken in while profit reflects a combination of inflows and outflows.
Companies use each metric differently to make decisions. They use revenue projections heavily when setting manufacturing expectations because they often use forecasted quantities of goods sold as the main driver as to what inventory to create. Companies are more interested in profit when they're deciding how to best allocate future capital. It may decide to invest more heavily into growth if a company expects strong periods of profit. Otherwise, it may decide to build its reserves.
Each category is influenced by accounting rules although revenue is often a purer number that's less susceptible to variation due to bookkeeping. There may be reliance on management estimates and more general ledger account balances when accounting for profit. Profit can be more impacted by accounting rules. Revenue is generally more influenced by market performance.
Calculating Revenue to Profit
Companies begin their income statements by reporting revenue. They end them by reporting net profit. Several steps are involved in getting from one category to the other. The formula for calculating net income and each step in the process are:
Net Profit = (Net) Revenue - Cost of Goods Sold - Operating Expenses - Interest Expenses - Taxes
Step 1: Calculate Net Revenue. This entails gathering all revenue sources and factoring in all appropriate items such as returns that directly reduce gross revenue.
Step 2: Calculate the Cost of Goods Sold (COGS). COGS is the cost of producing or purchasing the products that are 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. They don't include administrative costs that are geared more toward 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 those that are incurred to run the business. They include rent, utilities, salaries, marketing expenses, maintenance and repairs, and property taxes. These costs are necessary to run the business but they're not necessarily correlated to the production of a specific good that's 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 income taxes are two expenses that usually aren't included as operating expenses. They're reported below operating profit but they're 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
Amazon.com reported its fiscal year 2022 results in February 2023. The company generated $242.9 billion in net product sales and $271.1 billion in net service sales during that period. Both of these amounts include contra-revenue accounts such as returns but the general direction of these accounts is to report only money earned before broader company expenses.
The company's total net revenue was therefore $514.0 billion for the 12 months ending Dec. 31, 2022 even though the word "sales" is used on Amazon's financial statements.
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Analysts must review the expense side of operations to bridge from total revenue to total profit. Amazon spent over $288 billion on the cost of goods sold. The company had over $501 billion of total operating expenses in total omitting expenses such as taxes or interest.
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Amazon reported $514 billion of revenue but the company didn't earn a profit because it reported a net loss of $2.7 billion. This report highlights the importance of not judging a company's performance solely on its revenue. Some companies may report record levels of revenue though they have minimal or no net positive profit because of the cost structure and one-time expense implications.
Other Related Terms
Accrued revenue is the same as unrealized revenue. It's the revenue earned by a company for the delivery of goods or services that customers have yet to pay for.
Let's say acompany sells widgets for $5 eachon net-30 terms to all its customers. It sells 10 widgets in August. It invoices its customers on net-30 terms so they won't have to pay until 30 days later on Sept. 30. August's revenue will be considered accrued revenue as a result until the company receives payment from its customers.
The company would recognize $50 in revenue on itsincome statementand $50 in accrued revenue as an asset on itsbalance sheet. The cash account on the income statement increases when the company collects the $50. The accrued revenue account decreases and the $50 on the balance sheet remains unchanged.
Accrued revenue isn't the same as unearned revenue. It's the opposite.
Unearned revenue accounts for money that's prepaid by a customer for goods or services that haven't yet been delivered. A company would recognize the revenue as unearned and wouldn't recognize it on its income statement until the period for which the goods or services were delivered if it requires prepayment for its goods.
Can Profit Be Higher Than Revenue?
Revenue sits at the top of a company's income statement. It's the top line. Profit is referred to as the bottom line. Profit is less than revenue because expenses and liabilities have been deducted.
Is Revenue the Same As Sales?
Revenue is commonly referred to as sales but it's any income that a company generates before expenses are subtracted. Sales are what the firm earns from selling goods and services to its customers.
What Is More Important, Profit or Revenue?
Both are important but profit gives a more accurate picture of a company's financial position 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 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. Revenue is called the top line. A company's profit is referred to as the bottom line.
These two figures are very important to consider when making investment decisions but investors should remember that revenue is the income a firm makes without taking expenses into account. You should account for all the expenses a company has including wages, debts, taxes, and other expenses when determining its profit.
Correction - July 25, 2024: This article has been corrected to state that only property taxes are included in operating expenses and that the $50 on the balance sheet would remain unchanged in the accrued revenue example.
