Whether you’re a business owner or an investor, understanding the key differences between revenue vs profit is important. You also should know how to calculate each. Revenue and profit measure business performance and relate closely. However, they are also quite different. Here’s why.
Profit and Revenue Example
Here is a selection of data from Facebook’s second quarter 2019 financial report. It serves as an illustration for this discussion of revenue and profits.
Second Quarter 2019 Financial Highlights
Three Months Ended June 30, 2019 In millions, except per share amounts Revenue: Advertising $ 16,624 Payments and other fees $ 262 Total revenue $ 16,886 Total costs and expenses $ (12,260) Income from operations $ 4,626 Provision for income taxes $ (2,216) Net income $ 2,616 Diluted earnings per share (EPS) $ 0.91 Defining Revenue
Revenue consists of all income generated by business activities during an accounting period. Both revenue and profit are only relevant in relation to a specific accounting period, such as a quarter or year.
Some consider revenue “the top line” of a company’s financial statement. It may not actually be the topmost figure, however. This is the case with the Facebook report, which lists “Total revenue” on the fourth line. Wherever it appears, revenue consists of all income before expenses.
There are different sources of revenue. Revenue may come from sales of products, from fees charges for services, rent, interest, commissions and more. Any income generated by business activities is revenue.
Revenue may be called total revenue, as in the Facebook example above. It can also be called sales or turnover. These terms generally refer to the same thing. However, there are other types of revenue as well.
For instance, interest income exists separate from income generated by a company’s main business selling goods or services. Facebook’s main business is selling advertising. Revenues from “Payments and other fees” are added to advertising revenues to come up with total revenue.
Net revenue is another type of revenue that may come up from time to time. Net revenue is revenue minus adjustments for items such as discounts, refunds and returns.
There’s also accrued revenue. This is revenue a company earns by delivering goods or services not yet been paid for by the customer.
When a customer pays for undelivered goods or services, that is uneared revenue. Both accrued revenue and unearned revenue are important for accounting and tax purposes.
Profit is what’s remains of revenue after expenses. When people talk about the bottom line, they’re talking about profit.
Profit is usually the last line on the income statement and, in many ways, the most important. However, it’s not independent from revenue. It’s entirely possible to have revenues without profits. But it’s not possible to have profits without revenues.
Net income is another term for profit. The Facebook financial report uses this term.
Many consider profit “the bottom line,” but it isn’t the last line on Facebook’s report. Instead the last line reports earnings per share. Earnings per share divides net income by the number of outstanding shares. Many companies see it as a more important metric than net income.
There are different forms of profit and revenue. Gross profit is the cost of goods sold (COGS) subtracted from revenue. COGS consists of costs directly tied to producing whatever good or service the company sells. It may include raw materials and direct labor employed in production. Gross profit is normally bigger than net income. It takes into account other expenses such as taxes, as shown in the Facebook example.
Operating profit is gross profit minus operating expenses. Operating expenses may include additional costs such as rent and utilities. These are costs the business incurs. However, they don’t directly relate to producing goods or services. Facebook reports this as “Income from operations.”
While revenue can’t ever be a negative number, profit can. In this case, it’s a loss. A negative profit number or loss may be presented with a minus sign, in parentheses or in red ink.
The Bottom Line
Revenue cosists all income before costs. Profit is what reamins of income after costs. These are perhaps the two most fundamental and basis items in a business’s income statement.
Wondering how revenue and profit are affecting your bottom line? Consider speaking with a financial advisor to find out. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
Profit and cash flow are not the same. Cash flow is the amount of cash flowing into and out of a business. It’s possible to have good profits and poor cash flow due to the timing of payments and receipts. Both are important but cash flow can have more immediate impact on a business’s short-term prospects.
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