A great place to start gaining that fundamental understanding is by learning what “revenue” and “profit” are. While both terms relate to the amount of money that’s coming into your business, they’re completely different things.
The good news is, by reading this post, you’ll understand these two terms, the difference between them, and how each one affects your business.
How to Understand Revenue vs. Profit
What is Revenue?
Revenue is the money that comes into your company from sales of your goods and/or services. For example, if you run a restaurant, all the money that you generate in food and beverage sales is revenue.
However, not all money that comes into your business bank account is revenue. For example, if you take out a loan or open a line of credit, the money you receive isn’t considered revenue.
You may also hear revenue referred to as “sales revenue” or the “top line.” In most cases, these terms are used interchangeably. However, depending on your different revenue streams, you might refer to your sales revenue separately than, for example, revenue you earn through interest.
What is Profit?
While revenue is also called the top line, profit is referred to as the bottom line. The reason for this illustrates what profit is quite well. Imagine a spreadsheet that starts with your revenue on top and subtracts all your costs — taxes, payroll, etc. — in successive rows. The number that’s left, at the bottom, is your profit.
Knowing this, understanding the difference between profit and revenue should be straightforward. While revenue is all the money coming in from business operations, profit is the money that’s left over after you subtract all the costs of business operations.
How Do Profit and Revenue Affect Your Business?
The viability of your business is based on whether you can make a profit now or in the future. While you may generate impressive revenue numbers, if the cost of that revenue is too high, your business’s value won’t increase unless you can reduce costs.
In fact, this happened to Salesforce in their most recent earnings report. While they reported strong revenue growth — as this article points out — their operating expenses also rose 32 percent, which was one of the factors that contributed to their stock price decline.
The flip side of that, though, is also true. For example, if your revenue numbers are flat but you’re able to cut costs, you will have a more profitable business.
Ideally, you want to be growing both your profit and your revenue. Generally speaking, investors will see increasing revenue growth as evidence that your company has valuable upside. Increasing profits, on the other hand, shows that your company is well-run and in control of costs.
Conclusion: Make Sure You Understand Revenue vs. Profit
Profit and revenue are terms that describe two of the most important financial metrics for any company. At different times in the life cycle of your business, you may want to focus on one more than the other. For example, a small startup may spend their first few years in business exclusively focused on growing revenue. As it happens, despite their impressive revenue growth, many of the hottest tech companies, such as Uber, aren’t profitable yet.
However, these companies will eventually need to turn a profit or the money they receive from investors will dry up. This is why, ultimately, the long-term viability of your business requires a balance of strategies and tactics geared towards driving profit and revenue growth.