One of the most basic questions that people ask when they’re looking at a balance sheet is: What’s the difference between revenue and profit? Put plainly, revenue is all income before expenses, while profit is the bottom line.
There is one little trick to assessing revenue. All revenue comes from a company’s core business, not investments or subsidiaries. So a landscaping company, for example, can consider every dime that it makes from landscaping to be revenue, while everything that the business brings in from investments is not. Aside from that caveat, all income is revenue.
Profit is a little bit more complicated than revenue. It’s all revenue minus expenses. That means that everything a company brings in from its core business, minus everything that a company pays to stay in business, is profit. Profit either goes directly to the business operator, stays in an account used for further business, or is used to pay shareholders. It all depends on what sort of business we’re talking about.
There is also operating profit to consider. Operating profit is all revenue minus the cost of goods sold. In a retail business, this distinction is a very important one, while in a service business it becomes less so.
Real profit, as opposed to operating profit, is calculated by looking at the total revenue minus all fixed costs. This is an important distinction, because many costs aren’t fixed. Some examples of fixed costs include insurance, payroll, rent, and utilities.
The Profit Margin
Once you understand the difference between revenue and profit, you can put that knowledge to work by figuring out the profit margin for a business. The profit margin is profits divided by revenues, and it gives a good look at what the overall operating costs of a business are. For example, in a business with $60,000 in quarterly revenues and $22,000 in quarterly profits, the profit margin can be calculated to be 36.6%. That’s 22,000/60,000 = 0.366.
The profit margin is important, because it tells investors and businessmen how much profit they make per dollar of revenue. In our example, for every dollar in revenue the company makes $0.36 in profit.
Revenue vs Profit
So, as you can see, the difference between revenue and profit is an easy distinction to make. As long as you keep in mind that revenue only comes from a core business, and profit has multiple definitions. Although we didn’t cover operating profit in-depth, the difference between operating profit and total profit is an important one. Just like the difference between revenues and investment income is key.
Different types of business can have vastly different profit margins, depending on a variety of factors. Some businesses count on making a lot of revenue for an acceptable profit margin, while others make high amounts of profit on relatively little revenue. This is the difference between high-margin and low-margin businesses.
While it might seem like every business should be a high-margin business in order to be healthy, the fact is that revenue and profit are more complex than that. Still, just knowing the definition of the terms and how they apply can be a huge benefit whether you’re looking after your own business, or looking at investment information.