It can get confusing for a casual onlooker to differentiate between the revenue and profit of a business. No matter what it seems, a business owner knows the very difference between the revenue and profit of the company. There is good reason to confuse these two as both are used in the measurement of the business’ income.
No wonder, why these two terms are quite popular and frequently used in business circles. Revenue and profit both are intricately related to a business’s ability to earn on the frontline. To further clear out all the confusion, we will be discussing in detail revenue and profit, their differences, and their impact on a business.
The total income of the company from sales, and by excluding the business expenses you will get the total revenue of the company. Whatever the business earns on a regular basis from sales activities is pulled up under the revenue. Secondary business income such as bank interests may not be included in the revenue counting. The equation for revenue;
Number Of Goods Sold x Selling Price Of Each Product = Revenue
Operating revenue stands for the primary sales revenue actively acquired from the business. The revenue is clocked by the company by selling their products and services directly in a trade.
On the other hand, non-operating revenue refers to secondary revenue that is not acquired from primary business activities. This includes bank interests and other methods, where the business does not actively take part in the revenue-making process.
Revenue considers all the “top-line” numbers of the profit and loss statement. As it only considers the big numbers it is not capable of tracking the financial health of the business. However, the revenue tools are considered excellent for measuring business growth using comparison metrics and other factors.
On the other hand, the profit margin of a company is determined by considering the total income from sales and deducting the expenses. The amount that is derived from it is considered to be the net profit for the company. Therefore, profit is the ultimate measurement for actual business growth. The formula for calculating profit is;
Revenue – Business Expenses = Profit
The company first needs to work on its gross profit and then proceed towards net profit. Gross profit takes into account the sale of every item or service and the money made from it. By deducting the manufacturing and sales costs from the total sales you can easily get the gross profit of the company.
The net profit of a company is derived from the gross profit. From the gross profit, if you exclude the expenses related to business operations and taxes, you will get the amount of net profit.
Profit is more important than revenue as it allows a full spectrum of the business finances and the amount that the company gets to take home. Every business hopes for a high-profit margin. The profit and loss statement contains every detail of the business. After a monthly or annual accounting session, the company gets to take the profit after paying up the expenses.
Revenue Vs Profit: Differences
As from the article, you can already establish that revenue and profit are quite similar in nature but are also distinct in their ultimate approach. They share a hairline difference that is unnoticeable to people outside the business. For owners, these two aspects carry vast differences. Let us discuss the key differences between the revenue and profit of a company.
|Profit is the amount you get after taking out the expenses from the revenue.||Revenue only measures the cost of goods sold.|
|Profit is the subset of revenue.||That makes revenue the superset of profit.|
|The calculation of profit depends on revenue. However, profit is the final part of measuring business growth.||Even though revenue is important for calculating profit, revenue is not all that is required for understanding business growth.|
|Profit can be divided into two types. Gross profit and Net Profit.||Revenue also has two types. Operational and non-operational.|
Both revenue and profit are interconnected and the business requires both in its progression. A business has to follow proper steps and formulas to figure out the revenue and then profit. Even though they have a lot in common on the surface but they have different implications for a business.