Profit vs Revenue
“Revenue” and “Profit” are often confused with each other. There is a lot of skepticism on the usage of these terms. Are these two the same and can these be used interchangeably? When to use which term especially when talking w.r.t. business metric? These are some usual reservations around the usage of these terms.
What is revenue?
Revenue is the total amount of income generated by the sale of goods/services related to a company’s primary operations. Revenue is also known as “total sales” on the income statement. Revenue is also known as “top line” because it sits at top of the income statement.
Sales Revenue=Sales Price×Number of Units Sold
Revenue is the money brought into the company by its business activities. Revenue can be calculated in different ways —
- Accrual Accounting
Accrual accounting counts sales made on credit as revenue made for goods/services. Since it counts credit (money yet to come) as revenue, cash flow statements need to be analyzed to check how efficiently a company collects cash/money owed.
2. Cash Accounting
Cash Accounting only counts sale when the payment is received. Cash paid to the company in return for its goods/services is known as “receipt”. If the customer makes an advance payment, the company would have receipt but not revenue. Since revenue is sales done, i.e. the unit sold.
Types of Revenue
- Operating revenue
Operating revenue is the sales/revenue from a company’s core business. This kind of revenue is most likely predictable.
2. Non-operating revenue
Non-operating revenue is the revenue derived from secondary sources. As these non-operating revenue sources are often unpredictable or nonrecurring, they can be referred to as one-time events or gains. For example, proceeds from the sale of an asset, a windfall from investments, or money awarded through litigation are non-operating revenue.
What is profit ?
Profit is simply revenue minus expenses. Profit is the money made by the business after accounting in all expenses. Profit is also called net revenue.
Profit = Total revenue — Total expense
Types of Profit
- Gross Profit
Gross profit, which is sales minus the cost of goods sold. Sales/Revenue are the first line item on the income statement, and the cost of goods sold (COGS) is generally listed just below it.
For example, if Company A has $100,000 in sales and a COGS of $60,000, it means the gross profit is $40,000, or $100,000 minus $60,000.
Gross Profit = Total Sales — COGS
2. Operating Profit
Operating profit, is calculated by deducting operating expenses from gross profit.If Company A has $20,000 in operating expenses, the operating profit is $40,000(Gross Profit) minus $20,000, equaling $20,000.
Operating Profit=Gross Profit−Operating Expenses
3. Net Profit
Net profit, is the income left over after all expenses, including taxes and interest, have been paid. If interest is $5,000 and taxes are another $5,000, net profit is calculated by deducting both of these from operating profit. In the example of Company A, the answer is $20,000 minus $10,000, which equals $10,000.
Net Profit=Operating Profit−Taxes & Interest
