Once you subtract direct costs related to the sale, sometimes listed as Cost of Goods Sold (COGS), you are left with the company’s net revenue. Many small service businesses don’t have any cost of sales, while companies selling any kind of goods self employed accounting software will almost certainly incur a cost of goods sold. Before we dive into the differences between revenue and profit, let’s take a moment to define each term. Revenue is the total amount of money a business earns from sales over a certain period.

As noted above, revenue and income are often used interchangeably. Whether you’re looking for investors for your business or want to apply for credit, you’ll find that producing four types of financial statements can help you. Unfortunately, increasing your business’s revenue isn’t as simple as visiting your money tree or rubbing a magic lamp to get wishes from a genie. While we can dream about magical money situations, any business owner or manager can take steps to increase revenue. Increasing profits may be directly related to increased revenues, but the rate of increase may differ between revenue and profit. Profit can be categorized into gross profit, operating profit, and net profit.

How to Get From Revenue to Profit

If you’re only going to pay attention to one number in your business finances, profit should be it. This screenshot of the annual income from Tesla’s annual financial statement shows total revenue on the top line. Revenue and profit are both measures of a business’s income, but what’s the difference between revenue and profit, and how does each influence your business outcomes? When you’re running a business, it’s all about the bottom line. Revenue (the top line) and profit (the bottom line) are among the most important business metrics. If it seems like business owners and investors are obsessed with these key figures, there’s a good reason.

But income almost always refers to a company’s bottom line in a financial context since it represents the earnings left after all expenses and additional income are deducted. Whether you’re a business owner or an investor, understanding the key differences between revenue and profit is important. Revenue and profit measure business performance and relate closely. More formally put, revenue is the total of all money generated from the sales of goods or services.

How Do You Calculate Profit?

Profit, often called net profit, is quite literally placed at the bottom line on an income statement. Net profit represents the income remaining after all operating, and other expenses are subtracted from net revenue. In contrast, net profit further reduces revenue by deducting all other fixed and variable costs such as payroll, rent, insurance, supplies, utilities, and maintenance. Whatever amount of revenue remains after expenses is net profit, and any shortfall is a net loss.

• The formula for calculating net income and each step in the process is further explained below.
• Typically, when you hear people talk about profit, they’re referring to net profit.
• Revenue is the total income generated by the business before any expenses.
• To summarize, while there is a significant difference between revenue and profit, they are nonetheless closely tied.

These two terms have become part of the everyday vocabulary of modern society. Though they may be familiar to the average layperson, they are widely misunderstood and often used interchangeably. To survive, companies need to maximize their chances for profit and understand how revenue drives it.

Revenue vs. Profit

Think of revenue as a birdseye view of a company’s performance with a focus on the big picture. On the other hand, profit dives deeper into an enterprise’s finances and helps shape strategic decision-making. Revenue and profit are two key metrics telling the story of how a company is doing financially.

Once these residual sale items are accounted for, the company then reports net sales or net revenue. Bear in mind that net revenue does not include company expenses; it only reports the aggregated revenue factoring in certain aspects of revenue that may reduce the amount. Imagine a shoe retailer makes from selling its shoes before accounting for any expenses is its revenue.

Why You Can Trust Finance Strategists

Simply put, revenue is how much money a business brings in, while profit is how much money a business keeps after all expenses. Here’s another example to make it clear where you’ll find revenue and profit on an income statement. Here we continued our example from above to see the profit formula.

If you run a professional services business and earn an amount of money from bank interest, for example, that interest wouldn’t be considered revenue. Revenue and profit are two very important figures that show up on a company’s income statement. While revenue is called the top line, a company’s profit is referred to as the bottom line. But when determining its profit, you account for all the expenses a company has including wages, debts, taxes, and other expenses. For example, Ford Motor Company’s core business is selling cars so whatever amount it earns over a fixed period of time from the sale of cars will be its revenue for that period.

At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content. It’s important not only for knowing whether or not you’re making ends meet financially, but it also tells you what your business is worth if someone were to buy it from you. Revenue can also be called turnover – especially if it’s used in relation to finance or bookkeeping. Net revenue is another type of revenue that may come up from time to time. Net revenue is revenue minus adjustments for items such as discounts, refunds and returns.