In accountings there are many terms that could confuse you a little. All of them are important to know about to avoid confusion. Revenue is not the same as profit, they have differences.
Calculating the revenue is very important for every company. It is part of having a healthy knowledge about your business’ accounts. Making income is a task that requires effort, no matter what kind of business you have.
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Having a clear and transparent accounting in your company is important to avoid mistakes. This is why we must be familiar with the terms revenue, profit, net income, gross profit, and all their differences.
You will need some important tools for that, but you have to start by learning the terms. You have to know that revenue and profit can be completely different things, it has to be separated from other terms too.
A profit can be a loss; it doesn’t necessarily have to be positive always. And a company can have a great revenue and still lose money by completing a business.
Do want to know in-depth the difference between revenue vs profit? Keep reading
Can profit be higher than revenue?
The answer to this question is no, profit could never be higher than revenue. The thing is that the revenue is the amount of income generated by the accomplishment of the company’s main activity.
For example, if you have a candy store and you sell 100 candies each for one dollar then, you generated 100$. However, to have those candy on your store you had to pay for them, say 0.50$ each candy.
Then, the profit that you have at the end is 50$. IF you followed the example you will notice that then profit will never be higher than revenue. And also we got ourselves a tool that we can use to calculate profit anytime:
Profit equals revenue minus costs. The revenue is the amount of money produced by a company after completing an economic activity. And the revenue is calculated only when it comes from the main activity of the company. Which means that revenue is not included on extra income generated by subsidiaries or other works.
These are included in different accounts that does not have anything to do with the gross production of the company.
Why is revenue more important than profit?
Revenue is not, by instance, more important than profit, as we said, you can have a great revenue and still have losses. And if you have losses something you did wrong, or must change within your company.
Revenue vs profit doesn’t exist, there is no level of comparison, because they are simply different things. You have to know that the best balance between them is produced in function of the company’s investment.
You need to shorten the expenses out of the revenue of the business, because you normally invest to win. No matter how much the revenue is, if the expenses or investment are higher than the revenue you are bad.
Then, you would be losing money. What matters the most about the revenue is that it is higher, or at least equal, to the initial amount of the investment. If that is the case, you are going the good way.
All of this can be calculated by the starting point of the investment, before you spend the money. You must have a somewhat clear idea of how much you will earn in this case.
We say somewhat because there are expenses that are out of the calculation because they are not planned. But at least, something that doesn’t go too off the acceptable for your business.
Is net revenue the same as profit?
We could say that the net revenue is the same as profit, yes. Most of these terms despite of actually meaning something different they are all used for the same. The thing is, that for people that is already acquainted with this kind of term is easy to understand.
But for others that are surely newer than them in the matter it could result something different. There are two important terms that we have to know: Gross income and net income.
Both are different, but we could say they are good friends, one can be calculated with the other:
The gross revenue is the total amount of money that you have gained after you have completed a sale. For example, if you sold a car for 5000$ then your gross revenue for that sold would be 5000$.
However, if you sold a car for 5000$ but you had to pay reparations, mechanics, make overs, it’s different. In practice, we can’t simply call all of those 5000$ an income, because it required expenses.
Say that you spent 2000$ in all the reparations and stuff and then sold it, then the net revenue would be the 3000$ left. And this is the big difference between gross revenue and net revenue.
And don’t worry, you can call the profit net revenue, it’s simply the same, by concept. For some reason they invented many different words.
What is revenue cost and profit?
The revenue cost are the wages paid for the initial investment, we could call it the “cost” of your earnings. It’s the money you have to destine to all of your workers, distributors and everyone who is involved in the business.
The revenue cost is what we should exclude from the gross revenue to have the profit. The profit will be the total amount that you have out of a deal after you have taken out the revenue cost.
The revenue cost should always be less that the revenue itself, which is a different thing, also called “gross revenue”. At this point I’m sure that you should be understanding most of the basics that you want.