Revenue vs profit - One question we are often asked by our clients when they start up a new business is: “What is the difference between revenue and profit?”
Revenue is the measurement of sales transactions that the business makes when it sells its services or goods to another business or individual.
Whilst the majority of revenue will usually come from the sale of goods and services, a business can earn other types of revenue such as interest income or rental income.
Businesses will often focus on sales revenue growth as a measure of business success as it is the first number most will see when analyzing a set of accounts.
In the majority of cases however, revenue is generated after incurring costs in order to deliver this revenue. It is only when we deduct these costs that we begin to see the true success of a business in the profit figure.
Read more: What is Revenue?
Gross Profit is derived after deducting any costs that are directly attributable to sales such as, the cost of the materials and Labour to manufacture a product which is then sold to the businesses customers.
Operating Profit is calculated after ALL costs of the business are deducted including indirect costs such as rent, accountancy fees and marketing expenditure.
Gross Profit is a great way to understand how well the business is performing when deducting variable costs which fluctuate with sales. A business will need to achieve a required gross profit level in order to cover the overheads of the business and then produce a profit for the shareholders.
Revenue vs Profit: Which is more important?
Both revenue and profit have different importance to business owners and investors. Revenue growth will often show the demand for a businesses product or service and whether it is something worth pursuing and investing in however the profit of a business shows how well the operation is being managed and if costs are being monitored and kept under control.
Both of these numbers should form a key part of your business’ KPI’s being measured and any anomalies identified and acted upon with equal importance.Sign up in minutes
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About the author
Joe David, Founder & CEO, Nephos Accountants
At Nephos we believe that there’s a better way to grow your business. It’s time to bring your accounting into the digital realm, giving you greater control and clarity. The word ‘nephos’ is Greek for cloud, and nephologists study clouds to understand weather patterns. Like nephologists, we focus on the data held within the cloud, looking for patterns and movements that allow us to make the right financial forecasts and predictions. Nephos was built on the principle that technology can, and should, work harder for your business. Compliance is just one side of the coin – we don’t just help our clients to make sure they’re following the rules, we use our knowledge and insights to ensure they’re building for the future.