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Revenue and profit are often thought of as synonyms, but there are key differences between revenue and profit critical to the success and health of a business. In the simplest terms, revenue covers sales, while profit covers earnings. Both revenue and profit help entrepreneurs understand the financial portrait of their business from different angles so they can make the best decisions for it.
This guide will help you understand the key differences between revenue and profit, with helpful tips for monitoring and managing them, including what to do if either are in danger.
What is revenue?
The correct synonym for revenue is sales. Revenue is the total amount of money a business gets from sales of its goods or services before expenses are subtracted. A business’ revenue will appear on an income statement, generally near the top of the document.
For example, if you run a graphic design business selling digital portraits for download, and you sell $10,000 worth of illustrations in one month, that $10,000 is your revenue.
Revenue is also part of a business’ cash flow, the money moving in and out of the business every month, which tells the story of its growth and potential market demand. How much revenue your business has is dependent on a number of factors.
Competition: Other businesses like yours all vying for the same or similar customer base.
Pricing strategy: How you price your products or services can increase or decrease sales. This includes if you make price changes in the future because of external reasons (e.g., a change in the price of materials you use).
Demand: General interest in your products or services, which can be seasonal, price-related, or subject to other factors like trends. Less demand means less revenue.
Types of revenue
There are a few different revenue classifications. Two of the most important to understanding your business’ health are gross and net revenues.
Gross vs. net revenue
Gross revenue is the amount of money a business gets from its sales. This figure is before any deductions like discounts or sales. For example, if your business sells handmade candles, and you sell 100 at a $35 price point, your gross revenue would be $3,500
Net revenue is the amount of money your business earns after discounts and returns. Net revenue is also sometimes known as net sales.
Say your handmade candle business sold $5,000 in goods for a month but a number of items were discounted 20%, with six returns by customers. Your net revenue would subtract those deductions from the $5,000 gross revenue, including any restocking fees or return shipping costs.
More revenue types
There are a handful of other revenue types you want to keep top of mind for your business. Each of these give you a different picture of your business and its overall financial health.
Operating revenue: The amount of money earned by a business’ main operations, like the sales of goods or services.
Non-operating revenue: Money earned from the business’ activities that aren’t related to the main operation. This may include rental income from leasing space to another business or investment income.
Average revenue per unit: The average amount of money per customer or product sale.
Monthly recurring revenue: The amount of money earned each month from repeat business. This is meant to be predictable and generally comes from subscriptions or monthly discounts that bring customers back each month.
Annual recurring revenue: Predictable revenue measured by year. This could include annual subscriptions.
What is profit?
While revenue tells the story of your sales, profit tells the story of how much money your business has after deductions. Once everything like operating costs and expenses, such as product materials, are included, you have a better understanding of your business’ profit. This is also shown as your profit margin.
Like revenue, several factors can impact your profits.
Competition: Other businesses selling similar products to yours—potentially at lower price points—can impact your profit.
Products: If you have high-margin products that cost much less to produce than you charge for them, your business may have better profits.
Economy: When broader economic conditions aren’t great, people tend to buy less, which will impact your profit.
Third-party costs: Similar to the economy, supplier pricing, tariffs, shipping costs, and other fees can change unexpectedly and affect your profit.
Types of profit
There are a few different profit classifications and ways for you to analyze profit, but the two that tell the most important story about the financial health and wellness of your business are gross and net profit.
Gross profit
Gross profit is the amount of money that’s leftover after subtracting the cost of goods sold (COGS) from your revenue. Your COGS will include the materials and labor used to make your products for sale. To calculate COGS, you start with the cost of producing your current inventory and any new inventory you’ve added, then subtract the cost of your remaining inventory at the end of the month or year.
Let’s stick with the handmade candles example. It will cost you to acquire the wax needed to make candles. The cost will depend on the type of wax, along with other materials such as wicks, containers, or dyes. Additionally, if you have employees, that’s part of COGS and needed to evaluate your gross profit.
Say it costs you $10 to produce a $35 candle and you start the month with 800 candles. You create 200 more candles and end the month with 500 candles. Your COGS would be ($8,000 + $2,000) - $5,000 = $5,000.
To calculate gross profit:
Revenue - COGS = gross profit
Using the example above, your revenue from selling 500 candles would be $17,500. So your gross profit would be: $17,500 - $5,000 = $12,500.
Net profit
Net profit is the amount of money left over after every cost is deducted and is the strongest indicator of a business’ financial health. This subtracts any expenses including operating and non-operating expenses like leases or taxes, from your gross profits.
With the handmade candle business example, whatever the gross profit number is after deducting the COGS, that amount is then reduced because of other expenses, such as leasing a studio to make and ship out products.
To calculate net profit:
Gross profit - expenses = net profit
In the candle example, say your expenses are $4,000 per month. Using the gross profit number above, you’d be left with $8,500 as your net profit.
Differences between revenue and profit
While we can see the similarities, there are major differences between revenue and profit. One influences the other, but doesn’t yield the same monetary amount.
The key differences between revenue and profit to remember:
Revenue is money earned from operations, while profit is money that’s left over after deductions.
Revenue helps a business set general expectations for cash flow, while profit is how much money you actually have to spend.
Revenue indicates a business’ potential to scale or grow, while profit determines a business’ overall sustainability.
How to manage your revenue and profit
Understanding the difference between revenue and profit is the first step in managing both. One doesn’t exist without the other, and both drive your business toward whatever success you envision. To effectively manage your revenue and profit, below are a few tips and tricks to consider.
Optimize revenue streams. One way to protect your revenue is to optimize your revenue streams. This may look like offering better pricing, expanding product lines, putting work into attracting new customers—anything that adds more sales to your business.
Think about reducing expenses. Are there ways for you to reduce expenses without the product suffering? Negotiate with suppliers or find discounts on materials, or find other ways to reduce costs where you can.
Invest in high-margin products. For newer entrepreneurs, it may make sense to start out by focusing on products or services that yield more profit than others.
Regularly review your finances. The most important way to avoid any financial issues is to regularly review where your business spends money. Either with a professional or on your own, carve out time each month to review your small business’ finances. This can help you find where you need to cut back or potential opportunities to expand.