You need to understand the difference between revenue and profit when it comes to your business’ finances. And when you are trying to create the perfect budget, you have to accurately differentiate between those two. People often mistakenly and unknowingly use the two terms interchangeably despite the two being completely different! This might lead to severe accounting and budgeting errors in your business.
Now, if you want to invest in a company, you need to look at the firm’s income statement to determine how much money they are generating and spending. And guess which two figures you must heavily emphasize on? This article takes a closer look at each one and tells you why these concepts are important and exactly why you need them for an efficient budget.
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Revenue vs Profits
Revenue is the amount of money your company earns. It is essentially the face value of all the goods and services your company sells. Revenue is usually recorded quarterly, semi-annually or annually depending on the company’s income statement. It can be easily described as the income from a business’ normal activities and is also known as turnover, sales revenue or simply sales. Revenue is also called the top line of a company as it is always listed at the income statement foremost.
In short, revenue is the money your company makes before it incurs any cost. And it can be easily calculated with the formula:
Quantity X Price = Revenue
Profit is best described as the financial gain a company makes. It is the difference between income and costs, the amount earned and the amount spent on your operations. Profit is also known as the net income of the company. To generate profit, you need to generate even higher revenue. This way you can balance your expenses and still have money to spend. Expenses vary from taxes to repairing costs and are also unsurprisingly called the bottom line of the company. Profit can be easily calculated by the formula:
Profit = Revenue – Expenses
But, ultimately the primary difference between these two figures is that revenue is the income before costs are subtracted whereas profit is the income after cost is subtracted. Net income is positive only when there is sufficient revenue. High revenue and profit indicate a healthy, sustainable firm.
Revenue vs Profits: Some More Key Differences
1. Always keep in mind that revenue can be generated without profit, but the same cannot be said for profit. Net income is positive only when there is sufficient revenue.
2. Revenue indicates the entire money generated by a business through their goods and services whereas profit refers to the surplus amount only after all the taxes and necessary costs have been removed. A deficit would indicate a loss! Meaning the cost of the firms is larger than the earnings.
3. The stakeholders of your company will look at both your revenues and profits but will pay special attention to the profits as most shareholders are entitled to some of it.
4. Revenue cannot be controlled or determined beforehand as multiple external and internal factors affect it. Profit, on the other hand, can be easily analyzed and determined. When your company does not generate enough sales, you need to control your expenses to ensure it does not drag your profit margins down to a deficit.
5. Your profits reveal the value of your business while your revenue pinpoints the demand for your goods or services.
6. A company with high revenues will not necessarily make great profits. They could also be dealing with a large number of costs.
Pay Special Attention to Profits
Anyone can calculate profits without taking a crash course in business. But profits alone can portray a deceiving picture for the overall measure of success for a business. Take a closer look: P spends $9,000 and makes $10,000 worth of sales. On the other hand, Q spends $7,000 and makes $8,000 worth of sales.
Do you think they are both equally profitable? The answer is no. Revenue matters. If the maintenance costs for P decreases, its revenue will drop significantly as it will affect $10,000 worth of sales. But for Q, the revenue will drop marginally as it produces less and in the end, will generate more profit than P.
The profit margin portrays a more realistic image. While profits are measured in dollars, profit margins are calculated as a certain percentage or ratio. It is specifically the ratio between the net income and total sales. Profit margin should be tracked diligently as it reflects the long term profitability of a firm. The higher your profit margin, the larger the profit you will make in the longer scheme of things.
You can increase your company’s profit margin by charging more for your products and services. This is especially effective when there is a high demand for your product or if you are selling a necessity good. The other approach is to cut down your costs.
Companies often exclude a plethora of costs from their operating income to represent and inflate their profits than it already is. This causes their stocks (if any) to be overvalued and investors will suffer in the longer scheme of things. So, experts often pay attention to revenues, taxes, depreciation and so on. The income before all costs is what people pay attention to.
In conclusion, there is no doubt that profit and revenue are closely intertwined but you have to realize that two are significantly different. Revenues and profits represent two varying but equally important things. And you should pay closer attention to yours to ensure your financials catches the eyes of the most profitable stakeholders!