Key Takeaways

 

  • Revenue is the top line of a financial statement—it shows a business’s total income before expenses are deducted.

  • There are several types of revenue, including gross, net, non-operating, and MRR. 

  • Profit is the amount of revenue that remains after deducting all taxes and other charges. Put differently, it is the ‘bottom line’ of the income statement.

  • Gross, operating, and net profit are all types of profit, but they are used for different purposes in financial analysis.

  • Revenue shows market demand and growth potential; profit shows financial health and sustainability.

  • Post a job on UpCounsel to speak with a business lawyer in your state.

 

Distinguishing between revenue and profit is crucial for small business owners and entrepreneurs to manage their finances effectively. While these two financial metrics are often used interchangeably, they are, in fact, very different. 
 

In this article, we’ll outline revenue and profit, how they’re calculated, and why both are important for business strategy and the organization's overall financial health.

 

What is Revenue?

 

Revenue (or, more formally, total revenue), also referred to as the ‘top line’ on an income statement, is the total amount of income a company generates from its business activities before any expenses are subtracted. 
 

It’s a simple measure of whether a company can sell its products or services—a fundamental aspect of understanding what the market wants and, thus, its growth potential.

 

Types of Revenue

 

Gross Revenue: The total income before deduction for discounts, refunds, and returns. This is the raw earning power for any business.

 

Net Revenue: This is gross revenue minus returns, refunds, and discounts. This number represents how much the business retains after adjusting for customers returning merchandise or the business discounting the price.
 

Non-Operating Revenue: Money received from non-core business activities such as investment income, rental income, or sale of assets. It is not the same as the revenue generated by the company’s primary operations.
 

Average revenue per unit (ARPU): ARPU measures the average revenue generated per unit sold. It is commonly used in subscription businesses to evaluate what each customer contributes to a company’s bottom line.

 

MRR (Monthly Recurring Revenue): The revenue a company expects to be able to bill every month, usually from a subscription service.

 

Annual ARR: A measure similar to the MRR, but it projects the contracts for the annual use of subscription products or services.

 

Defining Profit: The Bottom Line

 

Profit is the amount left after revenue is subtracted from expenses, debts, taxes, and other deductions. It is the bottom line of the income statement or statement of financial activities. 
 

There’s more than one kind of profit to learn about, and each serves a different purpose in understanding the dynamics of a business’s financial results.

Types of Profit

  • Gross Profit: How well a business manufactures and sells its products or services. It is calculated as revenue minus COGS.

  • Operating Profit: This is gross profit minus operating expenses, which include rent, payroll, utilities, and other costs related to the company’s ongoing operation. It measures how profitable the company’s business is during normal operations, without the influx of non-operational income and no outflow of non-operational expenses.

  • Net Profit: The amount left over after taxes, interest, and one-off charges are deducted from gross profit.

 

This is the profit after ‘all’ expenses have been paid. Net profit is sometimes called ‘true’ profit, as it accounts for every financial charge a company faces.

 

Revenue vs. Profit: Key Differences

 

While the two metrics are both necessary and helpful, they differ. Revenue and profit are two distinct ways of thinking about financial analysis and business strategy.
 

Formula: Revenue = sales income + other income; Profit = revenue – all expenses
 

Significance: Revenue shows the demand for a company’s goods or services, whereas profit shows whether the company is financially self-sufficient.
 

Business Impact: High revenue does not necessarily mean profitability. A company could have substantial revenue but still incur a net loss if expenses exceed income.

 

How to Calculate Revenue and Profit

 

There are a few metrics you must get right if you want to evaluate the performance of a business. 

 

Here’s how to do it:

Revenue Calculation

  • Gross Revenue: Sum up all sales income within a given period.

  • Net Revenue: Subtract any returns, discounts, or allowances from gross revenue.
     

Example: A company selling 1,000 units of a product at $50 each would generate gross revenue of $50,000 (1,000 units × $50). 

 

If the company offered $5,000 in discounts and had $2,000 in product returns, the net revenue would be $43,000 ($50,000 - $5,000 - $2,000).

Profit Calculation

  • Gross Profit: Subtract the cost of goods sold (COGS) from revenue.

  • Operating Profit: Subtract operating expenses from gross profit.

  • Net Profit: Subtract all remaining expenses from operating profit, including taxes and interest.
     

Example: If sales generate $500,000 in revenue and the COGS is $300,000, the gross profit is $200,000.
 

After deducting $100,000 in operating expenses, the operating profit left over is $100,000.
 

Finally, subtracting $20,000 in taxes results in a net profit of $80,000.

 

Why Both Matter for Business Strategy

 

Revenue and profit are two fundamental measures that help you decide how to run your business. 
 

Generally speaking, you can tell how a company is doing from its revenue. In other words, you can tell how well your business sells products and how strong the market demand is for your offerings. 
 

Conversely, based on its profit, you can tell how the company manages its expenditures and sustains itself financially.
 

  • Revenue: Helps assess market demand, set sales targets, and understand growth potential.

  • Profit: Provides insights into cost management, pricing strategy, and overall financial health.

 

Is Net Revenue the Same as Profit?

 

Revenue and profit are often conflated, but they have important differences. 
 

Net revenue is the remaining income after subtracting discounts and returns, whereas profit is the surplus that emerges after deducting all expense items from revenue.
 

For instance, a business with a net revenue of $1 million might incur $800,000 in expenses, yielding a profit of $200,000.

 

Optimizing Profit Without Increasing Revenue

 

Making more profit is not only about increasing revenue. The cost side of profitability can also be well managed.
 

Here are some strategies to help your business earn more profits without increasing revenue:
 

  • Reduce Operating Costs: Streamline processes, renegotiate supplier contracts, and cut unnecessary expenses.

  • Improve Efficiency: Invest in technology that automates tasks and reduces labor costs.

  • Focus on High-Margin Products: Promote and sell products with the highest profit margins.

 

Final Thoughts on Revenue and Profit for Better Business Management

 

Small business owners and entrepreneurs must understand the difference between revenue and profit. Understanding these metrics allows you to assess a business’s performance and make critical decisions to ensure long-term sustainability.

 

FAQs: Revenue vs. Profit

Is Revenue Gross Or Net?

Revenue can be both. 
 

Gross revenue is how much you make in sales before you make any deductions. Net revenue is how much you have left in your sales once you subtract returns, discounts, and allowances.

What Makes Up Revenue?

Revenue consists of all income generated from sales and other business activities.

How Can Profit Be Higher Than Revenue?

Profit is never greater than revenue, but it can be high relative to revenue.