Revenue vs. Profit: What’s the Difference?

Are you tired of 9-to-5 jobs? Are you seeking another job with more freedom and opportunities? Are you a man of entrepreneurial spirit? If your answers are yes, chances are you will soon launch your own business. 

You’ve come up with a good business idea, done lots of market research, and even planned out a detailed marketing strategy. Good job, that’s almost everything you need from the outset. The only thing left is to outline how to make money for your business. Have you learned about revenue and profit? Do you know how to calculate them and how they are related to each other?

Unfortunately, if you haven’t considered these matters, it’s not time to hit the road because no business is able to survive without generating revenue and gaining enough profit. According to CBInsights data, running out of cash places at the top reason for startups’ failure. 

That’s why today, we’re here to bring relief to your problem. In this article, we’ll discuss everything you need to know about revenue and profit from what they mean, how to calculate them, and their relationship.

Understanding revenue

What is revenue?

Revenue or gross income is the money generated from your business operating and non-operating activities. The first source, operating income, comes from core business activities such as the sale of goods or the provision of services. On the other hand, non-operating income is derived from a secondary source which is often unpredictable or nonrecurring such as the sale of an asset or a windfall from investments. All in all, revenue is the total income you have before deducting any expenses or taxes.

How to calculate revenue?

The total revenue is made up of operating revenue (total sales revenue) and non-operating revenue. 

Total Revenue = Total Sales Revenue + Non-operating revenue

To calculate total sales revenue, combine all the sales revenue of each item you’re selling.

Total Sales Revenue = (Sales Revenue Item A) + (Sales Revenue Item B) + (Sales Revenue Item C)…

To calculate the sales revenue of each item, multiply its price with the number of sales.  

Sales Revenue (Item A) = Price * Sales Volume

The sales volume is the number of transactions that are recorded in the account book. This, however, depends on the accounting method employed, either cash accounting or accrual accounting. 

The cash accounting method records a transaction only when a payment is received. On the other hand, under the accrual method, transactions are documented when they are incurred rather than awaiting payment. This means a purchase is recorded as a transaction even though the funds are not received. 

The accounting method your business adopts to record sales will determine the total sales revenue. Small businesses use cash accounting while enterprises adopt accrual accounting. Unlike accrual accounting which records revenue before receiving payment for goods, cash accounting recognizes revenue only when a receipt is issued as proof of payment. 

Though small, your business can generate up to hundreds of receipts per month. It’s time-consuming to add every single receipt to the account book, then organize and make reports. If this process can be switched from manual to digital, it’ll save plenty of time. Shoeboxed is the ideal solution for small businesses. Shoexboxed turns receipts into data and makes revenue reports out of them easily. 

Understanding profit

What is profit?

Profit is a business’s total revenue minus total costs, expenses, and taxes. Though “revenue” and “profit” are often used interchangeably, they mean different things. People use these terms interchangeably because they think you’ll definitely have positive profit if your business has positive revenue. However, you can have strong revenue but still post a net loss if total costs exceed revenue. 

How to calculate profit?

Profit can be broken down further into gross profit, operating profit, and net profit. Gross profit is the income you earn after subtracting the cost of goods sold (COGS) from the sales revenue.

Gross profit = Sales Revenue – COGS

For example, Company A has a sales revenue of $50,000, and the COGS is $30,000. As a result, Company A’s gross profit is $20,000. 

The second tier of profitability is operating profit, which is calculated by deducting operating expenses from gross profit. Operating expenses are any expenses your business incurs through normal business operations such as rent, equipment, inventory costs, etc. 

Operating profit = Gross profit – Operating expenses

Assume that Company A has a $20,000 gross profit. If the operating expenses are $5,000 then their operating profit will be $15,000. 

The third level of profitability is net profit. This is the income that remains after adding in your non-operating revenue and subtracting your non-operating costs such as taxes and interest. 

Net profit = Operating profit + Non-operating revenue – Non-operating costs

Company A has an operating profit of $15,000, a non-operating revenue of $10,000, and costs for taxes and interest is $7,000. Their net profit will be $15,000 plus $10,000 and minus $7,000, which equals $18,000.

Revenue and profit: how are they related?

Revenue and profit are both important metrics to track business performance. They should always be put into consideration side by side to ensure positive output for your business. We’ve compiled a list of key information about revenue and profit and put them side by side for comparison.

Basis for comparisonRevenueProfit
MeaningRevenue is the money generated from your business operating and non-operating activities.Profit is the income that remains after subtracting total costs, expenses, and taxes.
TypesOperating revenue

Non-operating revenue
Gross profit

Operating profit

Net profit
PlacementThe top line of the income statementThe bottom line of the income statement
EquationTotal Revenue = Total Sales Revenue + Non-operating revenueGross profit = Sales Revenue – COGS (Cost of good sold)

Operating profit = Gross profit – Operating expenses

Net profit = Operating profit + Non-operating revenue – Non-operating costs
DependenceRevenue exists with or without profit. Without revenue, there will be no profit.
ImportanceRevenue is essential for operating a business.Profit is crucial for business survival and growth.

The bottom line

Operating a business is like going on a journey. Revenue is the supplies that keep your business alive. But profit is the foodstuff you need to survive through the journey. It’s important to have a good grasp of revenue and profit, not only their meaning but also how they are related and calculated.