Losing Money While Increasing Revenue?
Have you ever heard someone say that their business is doing great because they’re bringing in a lot of revenue, but then you find out that they’re actually losing money?
It can be confusing, right?
Especially when it seems like all those dollars coming in should mean profit for the company.
As such, it is important to understand the difference between revenue and profit when assessing the success of a business.
That’s where Profit Frog comes in. We help you get a handle on your company’s profitability.
The Differences Between Profit and Revenue
Generally speaking, revenue is the total amount of money that a company brings in through its various operations, whereas profit is the amount of money that is left after all costs and expenses have been paid.
In other words, revenue is what a company earns, while profit is what a company (or its owner) keeps.
There are a few different ways to look at this distinction.
One way is to think of revenue as the “top line” and profit as the “bottom line.” Another way to think about it is that revenue is the gross income of a company, while profit is the net income.
For example, for a business that makes $1 million in revenue but shows a profit of only $20,000 is not as successful as one that does $100,000 in revenue and shows $80,000 in profit.
The latter business has a higher profit margin (80% vs 2%), and also substantially higher total profit, despite lower revenue.
Revenue is also referred to as cashflow or cash flow, and is tracked on a cash flow statement. Understanding cash flow vs profit helps business owners stay on track.
Profit Frog emphasizes the importance of profit, and helps business owners understand what their profitability will be under different scenarios. With clear visibility into the drivers of profit, they can make choices for their company that will maximize profitability—rather than merely chasing revenue.
Revenue is the amount of money that a company receives from its sales over a specific period of time.
Revenue is a key metric for businesses, as it provides an indication of how much money is being generated. It is also used to calculate other important figures such as gross margin and net income.
If a company consistently brings in more revenue than it spends, it is said to be profitable.
Operating and Non-Operating Revenue
There are two types of revenue: operating and non-operating revenue.
- Operating revenue is the total amount of money generated from the core activities of the business, such as sales of goods or services.
- Non-operating revenue is generated from activities that are not part of the core business, such as investment income or government grants.
Operating revenue is more stable than non-operating revenue, since it is not reliant on external factors such as the stock market or the whims of donors. However, operating revenue can be harder to generate in the first place, and businesses may have to invest heavily in marketing and research and development in order to generate sales.
Non-operating revenue, on the other hand, can be easier to obtain but is less predictable. For example, a business may receive a one-time government grant that provides a boost to non-operating revenue, but it cannot count on this income stream in future years.
Accrued revenue is income generated that has not yet been paid. Accrued revenue shows up as accounts receivable on a company’s balance sheet, and is converted to actual revenue when the invoice is paid.
A Revenue Example:
Let’s say that you own a widget factory. You sell your widgets to customers for $100 each. In a typical month, you sell 1,000 widgets. This means that your revenue for the month is $100,000.
Now let’s say that in one particular month, you sell 1,500 widgets. This means that your revenue for that month is $150,000.
So in this example, an increase in sales led to an increase in revenue.
Revenue is simply the amount of money that a company brings in from its business activities.
However, it’s important to remember that revenue is not the same as profit.
Profit is the amount of money that a company has left over after it pays all of its expenses. So a company can have high revenue and low profit, or low revenue and high profit. It all depends on the company’s profit margin and its expenses.
You can use our scenario planning software to identify opportunities for future profit and revenue growth and estimate profitability under different scenarios.
The revenue formula is the equation used to calculate a company’s total revenue. Regardless of the industry, calculating revenue is key to understanding a company’s financial performance.
Usually, for product sales, revenue equals the average price at which goods are sold, multiplied by the total number of products sold.
For service companies, revenue equals the value of all service contracts (or the number of customers) multiplied by the average price of services.
Revenue vs Turnover
Turnover is the total sales made by a business in a certain period. It’s sometimes referred to as ‘gross revenue’ or ‘income’. This is different from profit, which is a measure of money remaining after expenses.
To calculate turnover, you simply take the total sales for a period and subtract any returns, discounts or allowances.
For example, if your business sold $100,000 worth of goods last month and had $10,000 in returns, then your turnover would be $90,000.
Easy enough, right?
But while business turnover is a useful measure of success, it’s often confused with profit.
Profit is what’s left of your turnover after you’ve deducted all your costs. Raw materials, labor, utilities, and other expenses all get deducted from revenue to arrive at your company’s profit number.
Expenses are typically divided into 2 categories. Cost of goods sold (COGS) are expenses involved in producing and delivering a good or service. Operating expenses (also called overhead or operating costs) are everything else.
So, if your total costs (COGS plus overhead) for the month were $80,000, then your profit in the above example would be $10,000.
That’s why turnover is sometimes referred to as the ‘top line’ and profit as the ‘bottom line’: profit is what’s left at the bottom after all your costs have been deducted from your turnover.
Revenue vs Sales
While revenue is the total amount of money that a company brings in from all sources, sales (sometimes referred to as gross sales) refers to the money that a company makes from its primary activity: selling goods or services.
Understanding the difference between revenue and sales is important for making better decisions about pricing, discounts, and other marketing strategies.
What Is a Simple Definition of Profit?
Most people understand that profit is the money remaining in a company’s bank account after all its expenses are paid. That’s fairly accurate, especially for small businesses. There are a few nuances worth exploring, however.
Profit is an accounting term that refers to the difference between the revenue earned from sales, and the expenses incurred in providing the goods or services being sold.
For a small business owner, profit is the amount of income remaining in the company to use at his or her discretion, after all expenses have been paid.
It’s the income that remains available to reinvest in the business, go into your pocket, or pay down debt.
A Profit Example:
Let’s say you run a business that brings in $100,000 in monthly recurring revenue. After you’ve paid all expenses, your business is left with $10,000 in profit.
Your company has a 10% profitability margin.
That $10,000 in profit is the reason you’re in business. You want to maximize it. Profit Frog helps you do just that by modeling under what conditions it will increase or decrease. Get started with your free Profit Frog trial today.
Types of Profit
There are three different types of profit, each with its own definition.
- Net profit
- Operating profit
- Gross profit
For the small business owner, operating profit and gross profit can be mostly an academic exercise. Net profit is the metric that matters—and the one Profit Frog emphasizes for owners of small businesses.
Net profit is the most important component of an income statement. It’s what businesses use to subtract all their costs from their generated revenue. The net sales number is used by executives and analysts to see how much profit a company has made.
The net profit margin is also a good indicator of profitability and is often used by investors to make decisions about investing in a company. If a company’s net profit margin is low, it may be time to consider cutting costs or increasing prices.
Profit Frog helps owners get a handle on their net profit and how to maximize it. Start your free trial today.
Operating profit is a measure of a company’s financial performance. It represents the amount of revenue that a company generates after deducting the business’s operating expense.
Operating profit is often used to assess a company’s ability to generate profits from its core operations.
Operating profit is typically reported on a quarterly or annual basis.
Company gross profit is a figure that sometimes shows up on the income statement, particularly for larger companies. It’s the amount of generated revenue that is left after the costs of goods sold have been subtracted.
Revenue vs Gross Profit vs Net Profit
The gross profit is your company’s total revenue minus the cost of goods sold. The net profit, on the other hand, is your gross profit minus all business expenses.
The gross profit margin is the percentage of revenue that remains after the cost of goods sold is deducted.
The net profit margin is the percentage of revenue minus expenses.
To calculate either margin, divide the relevant figure by total revenue. For example, if your gross profit was $100 and your total revenue was $1000, your gross profit margin would be 10%.
Knowing how to calculate gross and net profit margins is important for two reasons.
First, it allows you to track your progress over time. If your margins are increasing, it means you’re becoming more efficient and effective in running your business.
Second, it allows you to compare your performance to other businesses in your industry. If your margins are higher than average, it means you’re doing something right!
Revenue vs Profit formula
Calculating profit is pretty simple: take your total revenue, subtract your total expenses, and viola! You’ve got your profit.
Profit = Revenue – Expenses.
As this formula shows, a company can have high revenue but still have low profits if their expenses are also high. Conversely, a company with a low revenue can still be profitable if their expenses are low as well.
Pretty straightforward, right?
Let’s break it down further:
- Total revenue is the money that you receive from all sources—everything from sales to investments.
- Total expenses, on the other hand, include everything from the cost of goods sold to overhead costs like rent and utilities.
- Subtracting total expenses from total revenue gives you net profit.
Revenue vs Profit vs Turnover
Revenue is income that a company or business generates out of sales. It can also be generated out of commission, fees, interest.
Profit is the surplus from the revenue. It is the margin over the cost price of a product.
Turnover is the total sales volume of the company.
What are the key differences between revenue, profit, and turnover?
Let’s see from the formulas and examples.
Revenue = Number of Units Sold x Price per Unit
For example, if a company sells 100 widgets at $5 each, its revenue would be $500.
Profit = Revenue – Expenses
For example, if a company has revenue of $500 and expenses of $400, its profit would be $100.
Turnover = Number of Units Sold x Price per Unit
For example, if a company sells 100 widgets at $5 each, its turnover would be $500.
Clear as Mud?
By now, you perfectly understand profit vs revenue, right?
Revenue is obviously a very important business indicator, and it’s definitely something worth celebrating when your company hits its targets.
However,it’s important to remember that revenue is just one piece of the puzzle when it comes to business finances. You can’t run a business on revenue alone. Profit is the reason you’re in business.
As the owner of a small business, you stand to benefit the most from profit optimization.
So never lose sight of your goals around profitability and growing your bottom line.
Profit and Revenue FAQ
Here are some common questions we get about the differences between revenue and profit. If you have further questions, don’t hesitate to reach out.
Can profit be higher than revenue?
Given that profit is a subset of revenue (the portion of revenue left over after expenses), it cannot be higher than revenue.
However, there are a few ways that profit can temporarily appear to be higher than revenue.
For example, if a company has been operating at a loss for a period of time, it may sell some of its assets in order to generate revenue. This one-time infusion of cash could cause profit to appear higher than revenue in that particular year.
Similarly, if a company takes on debt in order to finance its operations, the interest payments on that debt will count as profit even though they aren’t actually generated from the company’s core activities.
Over the long run, the company will still need to increase revenue more than it spends to stay in good financial health.
What comes first, revenue or profit?
A company must be generating revenue before it can earn a profit. So, revenue comes first.
The age-old question of profit vs revenue can be difficult to answer.
In the short term, it may seem like revenue is more important, as it is the money coming in that will allow a business to keep operating.
However, in the long-term, profit is what really matters. A business may have high revenue, but if it is not making a profit, it will eventually go out of business.
Therefore, while revenue is important, profit must be the ultimate goal.
Profit Frog’s profitability modeling software can help you assess which profitability models will work best for your business and help you make the necessary changes to become profitable. Otherwise, a business will not be able to sustain itself in the long run.
We want to help you increase profit. Get started with your free trial today.
What is the difference between revenue vs earnings?
Earnings is another term for profit, or the amount of revenue left over after all expenses have been paid.
What is the difference between revenue vs income?
Income is another term for profit. Calculate income by subtracting all expenses from revenue.
What is the difference between gross profit vs net income?
Gross profit, also referred to as gross income, represents the profit remaining after COGS have been deducted from revenue. Net income, or net profit, is the amount of money remaining after ALL expenses (COGS plus operating expenses) have been deducted from revenue.
As such, net profit (or net income) is the crucial metric for small business owners to focus on.