When you open a profit and loss statement (P&L), there’s one number that everyone looks at first – the profit, or ‘the bottom line’.
However, in order to properly understand how a business is performing, a distinction needs to be made between profit and revenue.
Whether you’ve been running a business for a long time, or have just started a new venture, getting this right will help you in the long run.
Revenue vs. profit: an overview
Revenue is the total amount of money that your business generates, while profit is the money left over after you subtract costs and expenses.
A business can have a strong revenue figure but still struggle financially if expenses are high. On the other hand, a business with much lower revenue can actually be more healthy and stable if it maintains good profit margins.
If you’re looking for the best picture of overall profitability, net income is often the most helpful, as it reflects earnings after all expenses.
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What is revenue?
Revenue is the income a business earns from its primary services, such as the sales of goods or services. It can also be referred to as sales or turnover.
It represents the total amount of money earned before subtracting any expenses, such as payroll or rent.
Revenue is a core financial metric that helps to measure the performance of a business, assisting in knowing when to scale, or how much demand there is for your service or product.
What is profit?
Profit is the amount of money a business gets to keep after deducting the expenses incurred after selling products or services. It shows whether or not the business is actually making money.
There are multiple types of profit, but the most common are:
- Gross profit: revenue minus cost of goods sold (COGS)
- Operating profit: profit after operating expenses
- Net income: profit after all expenses, including taxes, interest, and non-operating income/expenses
Net income can typically be found as the final metric on a P&L statement, widely used as a key performance indicator (KPI) for profitability.
What is the difference between profit and revenue?
The biggest difference between revenue and profit is the timing of when the calculation is made.
- Revenue is the total earned from sales before expenses
- Profit is what remains after expenses
- Net income is the most complete version of profit, because it accounts for everything
Quick example of net income
If your business earns £100,000 in revenue and has £80,000 in total expenses, then:
Net income = £100,000 – £80,000 = £20,000
So your business might have generated £100,000 in sales, but you only get to keep £20,000 after covering all expenses.
How to get from revenue to net income
In order to get from revenue to net income, there are several key factors that need to be considered:
1. Cost of Goods Sold (COGS)
COGS is how much it costs for a business to produce goods or deliver a service. Revenue minus COGS gives you gross profit.
2. Operating expenses
Operating expenses include all day-to-day costs like:
- Wages and salaries
- Rent
- Utilities
- Software
- Marketing
Gross profit minus operating expenses gives you operating profit.
3. Taxes
All businesses pay taxes based on their income. Subtracting taxes moves you closer to net earnings.
4. Other Income and Expenses
Other income and expenses may include:
- Interest earned
- Interest paid on loans
- One-off expenses
After subtracting all of these items, you arrive at net income.
Example of revenue vs. profit
Let’s say that a toy store sells 1,000 toys at a price of £10 each.
- The total revenue generated will be £10,000
- The total expenses incurred will be £7,000
So to calculate net income: £10,000 – £7,000 = £3,000
In this example, the toy store generated £10,000 in revenue but only earned a profit of £3,000 after subtracting all expenses.
How to increase revenue and net income
There are many ways a business can increase and improve their sales and profitability. Here are some ways to do so:
Carefully increase prices
A price increase can boost revenue and net income quickly, but only if customers still see the value.
Expand your product or service offerings
Adding new products or services can help you reach new audiences and increase sales volume.
Strengthen marketing
Improved marketing can help you attract more customers and increase sales, helping to grow revenue without needing major operational changes.
Reduce unnecessary costs
Reducing expenses can help improve your profit margins. Look for ways to streamline your operations, negotiate better deals with suppliers, or reduce waste.
Improve efficiency
Improving your processes can help you become more productive and reduce costs. Look for ways to automate tasks, improve communication, and eliminate bottlenecks.
Expand your customer base
Finding new customers usually means you can generate more revenue. Partnerships, new channels, and new markets can help. Consider reaching out to new markets or partnering with other businesses to reach a wider audience.
Offer incentives
Loyalty programs, discounts, and other incentives can increase order frequency and average order value.
Every business is unique and what works for one may not work for another. It’s important to evaluate your own business’s strengths, weaknesses, and opportunities to identify the strategies that are most likely to work for you.
Revenue and profit in a financial modelling tool
Revenue and net income become even more valuable when you can forecast them. In a financial modelling tool, you can estimate future performance based on assumptions like:
- Sales growth
- Pricing changes
- Staffing costs
- Marketing spend
- Taxes and loan interest
This type of forecasting helps businesses make smarter strategic decisions, like whether to hire, launch a new product, or expand into a new market.
Tools like Brixx can also model different scenarios (best case, expected case, worst case), so you can understand how sensitive your net income is to changes in revenue or expenses. Get started today to see how this could work for you.
Frequently asked questions
Is revenue or profit more important?
Both revenue and profit are important for a business, but in different ways.
Revenue shows how much money a business makes from sales. For newer or fast-growing businesses, revenue growth is often a key focus because it helps to expand.
Profit, especially net income, shows how much money the business actually gets to keep after all expenses.
In short:
- Revenue measures scale and growth.
- Net income measures profitability and financial strength.
Can profit be higher than revenue?
No, net income cannot be higher than revenue.
Revenue is the total amount of money a business earns before expenses, while net income is what remains once all costs have been subtracted.
Because net income is calculated from revenue, it can only ever be equal to or less than revenue – never greater.
If expenses are higher than revenue made, the business doesn’t generate positive net income; instead, it records a loss.
Is revenue the same as sales?
Revenue and sales are not exactly the same thing, although they are related.
Sales typically refer to the value amount of goods or services sold during a specific period, while revenue represents the total income earned from those sales.
Because revenue reflects the total real income made, it is generally a more accurate measure of financial performance than the amount of sales alone.
How much of revenue is profit?
The amount of revenue that is considered profit depends on various factors such as the company’s expenses.
To calculate the net profit margin, you can use the following formula:
Profit Margin = (Net Profit / Revenue) x 100
This formula will give you a percentage that represents the profit margin of a business. The higher the percentage, the more profit the business is making from its revenue.
It is important to note that the profit margin can vary significantly from one industry to another and even from one company to another within the same industry. Therefore, it’s not possible to provide a general answer to your question without specific information about the company and its financial activities.
