Revenue vs. profit: What’s the difference? Revenue is the total amount of money a company makes from selling goods or services that are part of its main business. Profit, also called “net profit” or “the bottom line,” is the amount of money left over after all expenses, debts, other sources of income, and operating costs have been paid. In the context of ‘Revenue vs. Profit,’ revenue denotes the total income a company accumulates from its core business activities.
In a Nutshell
- The total money from the sale of products or services pertaining to the company’s core business operations is referred to as revenues.
- Revenues, commonly known as “sales,” do not take into account any expenditures or expenses related to running the business.
- Profit is the amount of money that is left over after all expenses, liabilities, other sources of income, and operating costs have been taken into consideration.
- While a firm’s earnings are referred to by both revenue and profit, a corporation can make revenue but yet make a net loss.
- In the ‘Revenue vs. Profit’ discussion, it’s essential to note that revenue, often equated with sales, excludes any business expenditures or operational costs
What is the Difference Between Revenue vs. Profit?
Revenues
In distinguishing ‘Revenue vs. Profit,’ revenue, commonly referred to as the top line, appears at the forefront of an income statement. The revenue figure is the income a company generates before subtracting expenses.
For example, the money a shoe retailer earns from the sale of its shoes before accounting for any expenses is its revenue. Revenue is not considered income if the company also has income from investments or a subsidiary.
“Revenue is what you take in, profit is what you keep.”
Robert Kiyosaki
This is because it does not come from the sale of shoes. Additional revenue streams and different types of expenses are accounted for separately.
Benefits Revenue vs. Profit
The ‘Revenue vs. Profit’ comparison highlights that while revenue gauges sales success, profit reveals the effectiveness of cost management and financial strategy. Profit is called net income on the income statement. But most people know it as the income statement. There are variations in profit on the income statement that are used to analyze a company’s performance. But there are other profit margins between the top line (revenue) and the bottom line (net profit).
For example, the term profit may appear in the context of gross profit and operating profit. These are steps on the way to net profit. Gross profit is revenue less the cost of goods sold (COGS), which are the direct costs attributable to the production of goods sold in a company.
Advertisement
This amount includes the cost of materials used in the creation of a company’s products, along with the direct labor costs used to produce them. Operating profit is gross profit less all other fixed and variable costs associated with operating the business, such as rent, utilities, and payroll.
Main Differences Revenue vs. Profit
When most people refer to a company’s profit, they are not referring to gross or operating profit, but to net profit. This is what is left over after expenses or net profit. Note that it is possible for a company to generate revenue but have a net loss at the same time.
Let’s take a look at J.C. Penney’s 2020 figures, reported in the company’s annual 10 K filing. The company suffered an income statement loss of $268 million, despite earning revenues of $11.16 billion. Losses typically occur when debt or expenses exceed profits, as in the case of J.C. Penney. A key aspect of the ‘Revenue vs. Profit’ dialogue is recognizing that high revenue doesn’t automatically translate into profit, as evident in scenarios where companies incur net losses.
Example of Revenue vs. Profit
This scenario with J.C. Penney perfectly encapsulates the ‘Revenue vs. Profit’ complexity, showing how substantial revenues don’t always result in profitability. These are the figures and the portion of J.C. Penney’s income statement mentioned above.
- Revenue: $11.16 billion
- Gross profit: $4.25 billion (total revenue of $11.01 billion – operating expenses of $6.84 billion)
- Operating profit: $268 million (less all other fixed and variable costs associated with operating the business, such as rents, utilities and payroll)
- Net income or profit: -$268 million (a loss)
Other Related Terms about Revenue vs. Profit
In our exploration of ‘Revenue vs. Profit,’ we see that accrued revenue, much like unrealized revenue, reflects income earned but not received, adding depth to financial analysis.
Accrued revenue is the same as unrealized revenue. For the delivery of goods or services for which the customer has not yet made payment, a company earns accrued revenue.
Here is a hypothetical example to demonstrate accrued revenue. Suppose a company sells widgets at $5 each on net 30 terms to all of its customers and sells 10 widgets in August. Since it bills its customers on net 30 terms, the company’s customers will not have to pay until 30 days later, or September 30. Consequently, the August revenue will be considered accrued revenue until the company receives payment from its customers.
From an accounting standpoint, the company would recognize $50 in revenue on its income statement and $50 in accrued income as an asset on its balance sheet. When the company collects the $50, the cash account on the income statement increases, the accrued income account decreases, and the $50 on the income statement remains unchanged.
Accrued income is not the same as unearned income. In fact, they are actually the opposite of each other.
Unearned revenue is the sum of money that a customer has paid in advance but has not yet received the goods or services. If a company requires payment in advance for its goods, it would recognize the revenue as unearned and would not recognize the revenue in its income statement until the period of delivery of the goods or rendering of the services.
Wrap Up
To summarize the ‘Revenue vs. Profit’ discussion, revenue assesses sales efficiency, while profit is the definitive measure of a company’s financial viability and operational success. Revenue, the “top line,” represents the gross income generated from the company’s core business activities before any expenses are deducted. It’s the starting point of the financial story, showcasing the company’s ability to sell its goods or services effectively.
On the other hand, profit, often termed the “bottom line,” is what remains after all expenses, debts, and additional income sources are factored in. This figure tells a more comprehensive tale, revealing not just the company’s sales efficiency but also its prowess in managing costs and maximizing profitability.
Investors and stakeholders pay close attention to both of these figures, but they scrutinize them differently. High revenue can indicate market dominance and strong customer demand, but without a corresponding profit, it raises questions about cost management and long-term sustainability. Conversely, a profitable bottom line, even with modest revenues, can signal efficient operations and a potentially sustainable business model.
The story of J.C. Penney in 2020, where significant revenues didn’t translate to profitability, serves as a cautionary tale. It underscores the delicate balance businesses must maintain between generating sales and managing costs. This example also highlights that external factors, like market conditions and changing consumer behaviors, can significantly impact both revenue and profit.
Understanding the distinction between revenue vs. profit is crucial for anyone involved in business, from investors to managers. While revenue provides a snapshot of sales effectiveness, profit offers a more in-depth look at overall financial health, encompassing efficiency, cost management, and the company’s ability to adapt to changing economic landscapes.
Finally, while revenues and profits are key indicators, they are part of a larger financial narrative. Comprehending their roles and implications in the broader context of a company’s financial statements is essential for making informed investment decisions and strategic business choices.
FAQs
The distinction between revenue vs. profit is a common one.
A company’s revenue is the sum of the money it makes from sales and services. Profit is the money that remains after all costs and revenues have been deducted from a business.
By adding up all of the money a company has made from sales and services, one can calculate its revenue.
Profit is calculated by subtracting all expenses from the total revenues of a company. This includes costs such as labor, materials, taxes, and various overhead expenses.
Sales of goods or services, interest income, and rental income are a few examples of revenue.
Labor costs, material costs, taxes, and other overhead are a few examples of expenses.
Revenues are at the top of a company’s income statement and are therefore the top line. Profits, on the other hand, are called the bottom line. Profit is lower than revenue because expenses and liabilities are deducted.
Revenue is often referred to as sales. But revenue is whatever income a company generates before subtracting expenses, while sales are what the company earns from selling goods and services to its customers.
Although both are important, profit gives a more accurate picture of a company’s financial position. This is because a company’s liabilities and other expenses, such as payroll, are already taken into account when calculating profit.
Profit is what remains of revenues after a company accounts for expenses, debts, additional revenues and operating costs.
Article sources about Revenue vs. Profit
At Capital Maniacs, we are committed to providing accurate and reliable information on a wide range of financial topics. In order to achieve this, we rely on the use of primary sources and corroborated secondary sources to support the content of our articles.
Primary sources, such as financial statements and government reports, provide firsthand evidence of financial events and trends. By using primary sources, we are able to directly reference information provided by the organizations and individuals involved in these events.
Secondary sources, such as financial analysis and commentary, interpret and analyze primary sources. While these sources can be useful for providing context and background information, it is important to use corroborated sources in order to ensure the accuracy and reliability of the information we present.
We take pride in properly citing all of our sources, both primary and secondary, in order to give credit to the original authors and to allow our readers to verify the information for themselves. We appreciate your trust in our website and are committed to upholding the highest standards of financial journalism.
- AnnualReports.com. J.C. Penney Company, Inc
- LegalZoom – Revenue vs. Profit – Revenue vs. Profit: What’s the Difference?
- The Motley Fool – Revenue vs. Profit: What’s the Difference?
