When you're running a business, it's all about the bottom line. Or is it all about the top line? Revenue (the top line) and profit (the bottom line) are among the most important business metrics. If it seems like business owners and investors are obsessed with these key figures, there's a good reason.
Revenue and profit are both measures of a business's income, but what's the difference between revenue and profit, and how does each influence your business outcomes? Let's find out.
Revenue is the total income generated by the business before any expenses. If you add up all of the business's sales from the year, that is the company's annual revenue.
More formally put, revenue is the total of all money generated from the sales of goods or services. This only includes revenue from regular business operations. If you run a professional services business and earn an amount of money from bank interest, for example, that interest wouldn't be considered revenue. Revenue only includes income from primary business activities.
Revenue is often called "the top line" because it is the big number at the top of the business's profit and loss statement. This number is extremely important to business owners and managers. To see how revenue works at a large public company, you can search for any company in the U.S. through the SEC's EDGAR database.
This screenshot of the annual income from Tesla's annual financial statement shows total revenue on the top line. The balance sheet is another important financial statement.
Revenue can't tell you the financial health of a business on its own. Still, a business's revenue trends are an excellent tool for measuring growth, comparing to other businesses, and gleaning other important analyses. If you run a business, you should know your business revenue.
As with all financial reporting metrics, Generally Accepted Accounting Principles (GAAP) define how to recognize revenue and how income statements should be prepared. Your accounting software or bookkeeper should provide you with a report that lays out revenue something like this example:
In the example above, "Net Sales" is the total of all sales from the year, less any returns. This is one common measure of a company's revenue, sometimes called gross revenue. Once you subtract direct costs related to the sale, sometimes listed as Cost of Goods Sold (COGS), you are left with the company's net revenue. Many small service businesses don't have any cost of sales, while companies selling any kind of goods will almost certainly incur a cost of goods sold.
Gross and net revenue are essential for nearly all businesses, big and small.
Expert Tip: If you divide net revenue by gross revenue, you get your company's gross profit margin. Gross profit margin is an extremely important number for businesses selling products. Well-run companies may see their gross profit margin increase over time.
Profit is how much money a business keeps after expenses. Profit is also called "net income" or simply referred to as "the bottom line" in financial slang. You may also see profit called "net profit." It's called the bottom line because you can find profits at the bottom of the profit and loss statement. In most cases, net profit, net income, and profit are synonymous.
In this screenshot of Berkshire Hathaway's annual income statement, you can see profit shown as "Net earnings" on the bottom line.
While Silicon Valley startups may have you thinking that revenue is the most important measurement of a business's success, many would argue that profits are much, much more important. After all, you know what happens to a company that earns a lot of revenue but can't make a profit. It goes out of business. If you're only going to pay attention to one number in your business finances, profit should be it.
For small to midsized business owners, profit is how much money you get to take home. The higher the profits, the more money you make. The significance of understanding your business profits cannot be understated.
While Accracy customers get updated profit and loss statements delivered monthly without lifting a finger, it's a good idea to understand how those numbers come together. Here's a look at a simplified income statement and profit calculation:
Here we continued our example from above to see the profit formula. Profit, or net income, is how much money a business keeps after paying all other operating expenses, including depreciation, interest, and taxes.
Because the profits matter in the end, most business owners focus here most. That's a wise place to look, but don't forget about the other details that go into your profits. From the top line to the bottom line, every line is part of the formula.
Expert Tip: Your operating profit may be different if you use cash basis or accrual accounting.
Simply put, revenue is how much money a business brings in, while profit is how much money a business keeps after all expenses. Here's another example to make it clear where you'll find revenue and profit on an income statement.
The top black box indicates total revenue or gross revenue. The second box is for net revenue. The final black box shows you the company's profit. Your business income statement should follow a similar layout.
Want to learn more? Check out the Accracy article on income statements.
Even busy business owners should take a little time to review their financial statements at least monthly with a keen eye on revenue and profits. While a one-month dip in either could be an exception, it could also be an indicator of a big problem. Conversely, a big jump could be a sign of an opportunity or success you'll want to understand to repeat. Without reliable financial statements, you're running your business blind.
Unfortunately, increasing your business's revenue isn't as simple as visiting your money tree or rubbing a magic lamp to get wishes from a genie. While we can dream about magical money situations, any business owner or manager can take steps to increase revenue.
Every business is unique, and there's no exact template for success that works for everyone. However, these two common strategies can help you increase revenue:
It's okay to get creative here. Advertising, pricing, and offering the right product or service at the right place and time all add up to business strategy success.
Increasing profits can be easier than increasing revenue in some situations, and increasing revenue often correlates to an increase in profits. Alternatively, you can look for areas to lower expenses, boosting profitability.
If you want to slash costs, here are some standard methods that could work for your business:
Revenue is a crucial business indicator and something worth celebrating, but you can't run a business on revenue alone. It's profit that keeps your cash flow up and business running long into the future. If you own a small business yourself, profits are likely what pays for your home, cars, vacations, and other expenses.
You probably wouldn't want to buy a stock for a company that isn't making money, and you should use the same logic when running or starting your business. As the primary owner of your company, you benefit most from solid revenue and profits. Never lose track of your goals around profitability and growing your bottom line.
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