Tax & admin · 18 January 2018

The difference between revenue and profit and how to calculate both

Businessman composing a successful financial chart with arrow going up, he is using green paper cuts, eco business and financial success concept
By understanding their company’s finances, owners can ask key questions on how the business is run

Here, Business Advice looks at the difference between revenue and profit – two concepts that both refer to money made by a company, but which are often conflated.

As a business owner, you need to know how to maximise your profit, and to demonstrate to investors the company is heading in the right direction. While revenue can indicate a firm’s potential, profit is able to show how efficient its operations are.

The crucial difference between revenue and profit is that a company can increase its revenue but register a net loss of earnings overall. The easiest way to understand when each term is used is to view a typical income statement, otherwise known as a profit and loss statement.

income_statement
How your income statement might look

With an overview of revenue and profit, business owners can gain a full understanding of their company’s finances and ask key questions on how the business is run. They can consider which areas are underperforming, if products are priced too low and if operating costs are too high.

To help readers put together an income statement, we’ve broken down and defined each concept you are likely to encounter.

Revenue

Revenue refers to the total amount of money generated and received by a firm through its business activities. Essentially, revenue means sales and is the so-called “top line” – i.e. the first line on a profit and loss statement.

Find out how to put a profit and loss statement together

For example, a business owner might calculate their firm’s revenue by multiplying the price goods and services are sold at by the number of units sold.

These typical business activities refer to a firm’s operating revenue. Non-operating revenue could come in the form of dividends, interest and royalties and would be included in the net revenue figure.

As we’ve already said, a company can generate increased revenue, but still have operated at a loss. Profit then becomes a useful way to measure the efficiency of a business.

Different kinds of profit

Gross profit

Revenue minus cost of goods sold

On an income statement, gross profit is the first to appear after revenue. It is calculated by taking total revenue and subtracting the cost of goods sold (COGS).

As a metric, it is used by business owners to gain an idea of how much money they have with which to fund the business after their core product is produced.

Operating profit

Gross profit minus expenses

After this comes operating profit – gross profit minus all fixed expenses encountered when running a business, such as payroll, rent and utility bills. Operating profit is used to demonstrate the earning power of a business in terms of its regular operations, removing external factors to show its potential profitability.

A company may choose to use operating profit over net profit to highlight the financial impact of external overheads. For example, investors can use the operating profit to compare the business with a similar firm operating under a different tax structure. 

Net profit

When people talk about a firm’s profit, they will usually be referring to net profit – the remaining income after all operating costs, debts and expenses.

Also known as net income, net profit is the so-called “bottom line” – the metric at the bottom of an income statement which demonstrates a company’s overall profitability.

Net profit is arguably the most important financial metric on the income statement, and the figure most important to investors and shareholders.

Net profit margin

The net profit margin is the ratio of a company’s net income to its revenue, typically presented as percentage.

Take a look back over our other “difference between” articles to ensure you’ve got the basics of business covered

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Revenue or profit: Line your pockets or grow your business?

When your small business starts making money, you can either choose to take revenue or profit. Will you take the money or re-invest it back in to your business?

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ABOUT THE EXPERT

Simon Caldwell is deputy editor at Business Advice. He has a BA in politics and communications from the University of Liverpool, and has previously worked as a content editor in local government and the ecommerce industry.

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