It is no news that a lot of small businesses fail due to poor financial management. According to the Small Business Administration, many small businesses fail as a result of many factors, financial mismanagement inclusive. 

This emphasizes the importance of knowing your financial terms and the roles they play in your business. In this post, we shall be exploring the difference between revenue and profit. 

Revenue and Profit are two important metrics of any business. Therefore, understanding the crucial details of the two is something that you cannot compromise on as a business owner who wants business success. 

This understanding will help you make informed decisions and ultimately, attain business success. After all, a business run by someone without proper financial knowledge is bound to fail. 

What is revenue?

Revenue is the total amount of money that a company has brought in by its operations over a set period.

It means that a company’s total earnings before things like tax liabilities, profits, and other expenditures are removed, is its revenue. And all this is calculated within a set amount of time. 

Simply put: 

After selling your products/services within a specific period, how much do you get in total? The answer to this is your revenue.

It is also noteworthy that on your company's income statement, revenue should appear first. This is why it is known as the top line. 

How is revenue calculated?

To correctly calculate your revenue, you need to keep track of how many items you have sold over a while. You also want to keep track of the exact items they were (because prices vary depending on the item). You can get a cash register for this.

If you are calculating your revenue for the first quarter of the year, you calculate everything you sold every day from 1st January - 31st March. 

A company can decide to further break down how it classifies its revenues. Imagine a company that has both products and services, for instance. It can decide to calculate the revenue for products separate from the revenue for services. 

Take, for example, your business sells electronics (products) and also has a consulting arm (service). You may decide to separate the revenue for these two arms of the business. It all depends on the way you want it to go. 

Likewise, a company can decide to separate the income generated from its core business from the ones generated from secondary sources. 

What is profit?

Profit, on the other hand, is the remaining money you realize by the time you have removed all your expenses from your revenue. 

When you get your revenue, you remove the production costs, delivery costs, taxes, salary payments, rent, and operational costs.

The benefit you realize after removing all these is your profit. But if your revenue isn't more than your total expenses, then you have run at a loss. 

Profit is so important to business because making money is the primary goal of any business. That a business makes a profit also shows potential investors that it is good ground for investment. 

Conversely, a company that always runs at a loss sends warning signals to potential investors because they cannot see that company as worth their investment. 

The simple formula for calculating profit is:

Total Revenue - Total Expenses= Profit 

Let us put it in an example:

Remember our total revenue from the last example?

Total Revenue: £22,200

Say, our expenses for the quarter are as follows:

Production Costs— £5,000

Delivery Costs— £1,500

Taxes—  £1,800

Salary Payments—£2,000

Rent— £2,000

Operational Costs— £3,000

Total Expenses= £15,300

Profit is calculated thus:

£22,200 - £15,300= £6,900

It means that your company made a profit and didn't run at a loss. 

3 types of profits 

There are 3 major types of profits and we'll talk about them in the following bullet points: 

Gross profit

This kind of profit shows how profitable core business operations are, minus other expenses. Gross Profit is simply your revenue minus the cost of goods sold. It focuses on production costs. 

Gross Profit= Revenue - COGS

Example:

Revenue: £22,200

Production Cost:  £5,000

Delivery Cost: £1,500

Therefore, total Cost of Goods Sold (COGS)= £6,500

Gross Profit: £22,200 - £6,500 = £15,700

Operating profit

Operating Profit, on the other hand, is your Gross Profit minus Operating Expenses. The purpose of this type of profit is to reveal profitability from core operations, and this time, including operational costs. 

Operating Expenses include things like rent, salaries, utilities, and so on. 

Operating Profit= Gross Profit - Operating Expenses 

Example: 

Gross Profit: £15,700

Salaries: £2,000

Rent: £2,000

Operational Costs: £3,000

Total Operating Expenses= £7,000

Operating Profit: £15,700 - £7,000 = £8,700

Your Operating Profit is £8,700

Net profit

When it comes to this type, you deduct things like taxes, interests, and Non-Operating items (like investments) from our Operating Profit. Whatever is left is our Net Profit. 

The purpose of calculating Net Profit is that it shows your business’ overall profitability even when you include Non-Operational Income and Expenses. 

The simple formula for calculating this is:

Net Profit= Operating Profit - Taxes - Non-Operating items - Interests

Example: 

Operating Profit: £8,700

Taxes: £1,800

Net Profit: £8,700 - £1,800= £6,900

Conclusion 

With this, the difference between revenue and profit is clear. While revenue is the total amount of money that comes in from your business operations, profit is not.

It is the benefit you realize after removing all expenses from your revenue. Both are calculated within a specific timeframe. 

Your business' financial management will suffer if you don't have enough knowledge of these important financial concepts.

If you had been getting revenue vs. profit all wrong before now, this post serves as good material to help you out. 

Looking for a way to manage your business' finances without issues? Download the OhentPay app today to begin.