Your sales are taking off. That’s something to celebrate. Then again, with more sales usually comes more expenses. If those added costs exceed sales, your business will end up losing money, in spite of the increased sales.
This is why the difference between sales (also known as revenue) and profit is so important. Both are critical measures of financial performance, but they have very different meanings and implications.
Here are some essential things to know about revenue and profit.
What is revenue?
Revenue, often synonymous with sales, is the total amount of money a business receives from selling goods or services to customers.
Revenue is entered on a business’s income statement, also called a statement of operations. The income statement is a list of all money coming in (revenue), and all money going out (expenses) to calculate what’s left over in the form of profit. Because revenue is the first entry on a business’s income statement, it’s often referred to as the top line.
Any money generated from sources other than regular business operations, such as income from rent or investments, typically is excluded from revenue and appears farther down the income statement as non-operating income. Including this number in top-line revenue is discouraged because it can mislead investors, lenders, and auditors.
5 revenue classifications
You can classify revenue in several ways:
Gross revenue
Gross revenue, or total revenue, is the total amount of money brought in from the sales of goods and services.
Net revenue
A company’s net revenue is the gross amount received, minus any customer returns or discounts. Most companies, especially retailers, incorporate returns and discounts into their top-line net revenue or sales figure.
Operating revenue
Also called operating income, it’s the amount generated by a business’s main operations, typically sales of products or services. Companies may cite this amount to distinguish it from other revenue.
Non-operating revenue
Also called non-operating income, this is the amount of money derived from activities unrelated to the company’s main business. Non-operating revenue includes rental income, investment income, or one-time gains from asset sales. These items typically appear lower on the income statement and are reported separately for accounting and tax purposes.
Recurring revenue
Companies receive this type of revenue based on monthly or annual subscriptions or other customer payment agreements. Many ecommerce businesses rely on monthly or annual recurring revenue for a more predictable income stream than one-off or occasional sales.
What is profit?
Profit is the amount of revenue remaining after you subtract all expenses. Things that affect your business’s revenue, such as general economic conditions and market demand for your product, may also have an impact on your profit.
4 profit classifications
You can analyze profit at different levels, depending on which costs you subtract from revenue:
Gross profit
Revenue minus cost of goods sold (COGS), or the cost of sales, is gross profit. It is the first and most basic measure of profitability, showing how efficiently a company produces or delivers its products or services. Gross margin is a company’s gross profit as a percentage of sales or revenue.
Operating profit
Gross profit minus operating expenses or overhead—costs not directly attributable to production, such as office rent, salaried staff, and utilities—is a company’s operating profit or income. It too often is analyzed as a profit margin by expressing operating profit as a percentage of revenue.
Net profit
Net profit, also known as net income or earnings, is the operating profit plus non-operating income (like dividends and one-time gains on asset sales) minus non-operating expenses (such as debt interest, one-time losses, and taxes).
Net profit is the final indicator of a company’s financial health, because it accounts for all expenses, showing what remains for a company’s owners and investors.
Since it appears at the bottom of an income statement, net income often is referred to as the bottom line, and it’s the most cited profit measure in financial reports.
Publicly traded companies with shareholders also report earnings per share (EPS), which indicates how much of the net profit is attributable to each share.
Other profit
Other profit measures include pretax profit, which is profit before deducting income tax payments; earnings before interest and taxes (EBIT); and earnings before interest, taxes, depreciation, and amortization (EBITDA). These can offer insights into a company’s performance. Although financial professionals often use them, they don’t conform to generally accepted accounting principles (GAAP).
Revenue vs. profit: key differences
Revenue and profit both measure a business’s financial performance, but they are quite different. Unlike profit, revenue doesn’t account for the costs of running a business.
Revenue offers insight into a business’s growth and demand for its products. Factors outside a business’s control, such as economic conditions or demographic shifts influencing customer demand, can affect revenue growth. Companies and investors generally focus on the revenue growth rate in percentage terms as much as the total amount of revenue.
Profit shows how well a company manages its expenses, giving a clearer picture of a company’s financial health. Internal factors, mainly management’s ability to control costs, more directly affect profits. Failure to control expenses can result in diminished profit or a net loss, even if the company generates ample revenue.
How to calculate revenue vs. profit
- Calculate net revenue
- Determine cost of goods sold
- Calculate gross profit
- Add up all operating costs
- Calculate operating profit
- Add non-operating income and expenses
- Compute taxes
- Calculate net profit
A business’s profit is calculated in stages, moving progressively down the income statement, starting with revenue and concluding with net profit. Here are the key stages and calculations:
1. Calculate net revenue
The business adds up all sales of products or services to calculate total revenue. For retailers and many ecommerce businesses, sales figures are reduced by customer returns, discounts, or other allowances, to determine net sales:
Sales - Returns, discounts, allowances = Net revenue (Net sales)
2. Determine cost of goods sold
Cost of goods sold (COGS) is the direct cost of manufacturing products sold during a period. It includes the materials costs and wages for labor used in production:
Materials costs + Labor costs = Cost of goods sold
For retail and ecommerce businesses, the equivalent of COGS is cost of sales or cost of order fulfillment, such as inventory purchases and order-processing expenses.
3. Calculate gross profit
Subtracting the COGS from sales equals gross profit for manufacturers:
Sales - Cost of goods sold = Gross profit
Retail and ecommerce businesses perform a similar calculation:
Net revenue - Cost of sales = Gross profit
4. Add up all operating costs
A business incurs operating expenses, commonly called overhead or selling, general, and administrative (SG&A) expenses, regardless of production. Operating expenses typically include:
Rent + Utilities + Staff salaries + Sales and/or marketing expenses = Operating expenses
5. Calculate operating profit
Subtract operating expenses from gross profit to arrive at operating profit:
Gross profit - Operating expenses = Operating profit
6. Add non-operating income and expenses
Non-operating income includes dividends and interest on investments, plus gains on the sale of assets. Non-operating expenses include interest on debt and losses on asset sales, or losses from legal judgments. Any such non-operating income is added to operating profit, and non-operating expense is subtracted, to determine pretax profit.
Operating profit + Non-operating income - Non-operating expense = Pretax profit
7. Compute taxes
Income taxes are reported below pretax profit or taxable income on an income statement. Taxes are based on a company’s tax rate, which typically is a percentage based on the taxes owed to the government. This rate does not include state, local, sales, or property taxes, some of which may be deductible from federal tax payments.
Pretax profit x Tax rate = Tax expense
8. Calculate net profit
Finally, subtract tax payments from pretax income to arrive at net profit, the final entry on the income statement:
Pretax income - Taxes = Net profit
Revenue vs. profit FAQ
Is revenue and profit the same?
No, revenue and profit are different things. Revenue is the total amount of money a business receives from selling goods or services. Profit, or net income, is what’s left after subtracting all expenses from revenue.
What is an example of revenue vs profit?
Imagine your business had net revenue of $500,000 in a quarter, after customer returns and discounts. It also had costs of sales and order fulfillment of $200,000, operating expenses of $150,000, and debt interest and taxes of $50,000. These are subtracted from net revenue. Profit, or net income, for the quarter then is: $500,000 - $200,000 - $150,000 - $50,000 = $100,000.
Does revenue mean sales?
Revenue and sales sometimes mean the same thing. If a business’s only source of incoming money is from sales of products or services, then revenue is the same as sales. Companies with income from investments, interest, or rent classify this money as non-operating income or revenue, and they record it on financial statements separately from sales.
