Revenue vs. Profit: An Overview

Revenue is the total amount of income generated by the sale of goods or services related to the company's primary operations. Profit, which is typically called net profit or the bottom line, is the amount of income that remains after accounting for all expenses, debts, additional income streams, and operating costs.

Revenue

Revenue is often referred to as the top line because it sits at the top of the income statement. Revenue is the income a company generates before any expenses are subtracted.

Imagine a shoe retailer makes from selling its shoes before accounting for any expenses is its revenue. Income isn't considered revenue if the company also has income from investments or a subsidiary company. That's because it doesn't come from the sale of shoes. Additional income streams and various types of expenses are accounted for separately.

In addition, companies often report gross revenue and/or net revenue. Gross revenue is all of the sales a company makes prior to any returns or pricing discounts. Once these residual sale items are accounted for, the company then reports net sales or net revenue. Bear in mind that net revenue does not include company expenses; it only reports the aggregated revenue factoring in certain aspects of revenue that may reduce the amount.

What Impacts Revenue?

There are many factors that may impact the revenue a company is able to bring in as part of its operations. If a company's products or services are in high demand, it can lead to an increase in revenue. Conversely, if there is a decrease in demand, it can lead to a decrease in revenue. Companies must be sensitive to what they charge, as pricing is a crucial factor in determining a company's revenue. If a company sets its prices too high, it can also lead to a decrease in demand. A company may earn less revenue based on external competition. Competition can impact a company's revenue by affecting its market share. If a company faces intense competition, it may have to lower its prices or risk missing out of certain customers altogether.

The revenue a company earns is also impacted by general economic conditions. During a recession, for example, consumer spending may decrease. This may also be the case for products that are seasonal, as a company may simply be at the whim of cyclical demand (i.e. retails during the holidays).

Profit

Profit is referred to as net income on the income statement, and most people know it as the bottom line. There are variations of profit on the income statement that are used to analyze the performance of a company. For instance, the term profit may emerge in the context of gross profit and operating profit. These are steps on the way to net profit.

Gross profit is revenue minus the cost of goods sold (COGS), which are the direct costs attributable to the production of the goods sold in a company. This amount includes the cost of the materials used in creating a company's products along with the direct labor costs used to produce them. Meanwhile, operating profit is gross profit minus all other fixed and variable expenses associated with operating the business, such as rent, utilities, and payroll.

What Impacts Profit?

Since profit is a component of revenue, all of the impacts to revenue also impact profit. However, profit is impacted by more factors as there are more items involved in the calculation. For starters, companies may have escalating costs for COGS or other direct costs associated with producing or purchasing the products it sells. On the other hand, should the company be able to manufacture goods more efficiently, this may increase profit without impacting revenue. Companies are also usually mindful of operating expenses, and these costs are the expenses that a company incurs to run its business. If a company can reduce its operating expenses, it can increase its profits without having to sell any additional goods.

Companies can also be mindful of net profit by considering taxes and interest. To avoid interest expense, companies may need to raise capital by offering equity, though this may detract from retained earnings in the long run if investors demand dividends. To avoid taxes, companies must deploy considerate planning and implement legal avoidance strategies. If a company can be mindful to both, it would reduce its expenses in both areas and ultimately increase profit (again, without having to earn any additional revenue).

Key Differences

When most people refer to a company's profit, they are not referring to gross or operating profit, but rather net income. This is what's left over after expenses or the net profit. Keep in mind that it is possible for a company to generate revenue but have a net loss at the same time (which we'll see in the Amazon example below).

One of the primary differences between revenue and profit is where each number is reported on a company's income statement. Revenue is always reported towards the top as it is less inclusive; meanwhile, profit is always further down as it incorporates expenses. This leads to another key difference: revenue only incorporates the money taken in, while profit reflects a combination of inflows and outflows. Companies use each metric differently to make decisions. Companies use revenue projections heavily when setting manufacturing expectations as companies often use forecasted quantities of goods sold as the main driver to what inventory to make. On the other hand, companies are more interested in profit when deciding how best to allocate future capital. If the company expects strong periods of profit, it may decide to invest heavier into growth. If not, it may decide to build its reserves. Last, each category is influenced by accounting rules, though revenue is often a more pure number less susceptible to variation due to bookkeeping. When accounting for profit, there may be reliance on management estimates and more general ledger account balances. Therefore, profit may be more impacted by accounting rules, whereas revenue is generally more influenced by market performance.

Calculating Revenue to Profit

As mentioned above, companies begin their income statement reporting revenue and end it reporting net profit. Along the way, there are several steps to get from one category to the other. The formula for calculating net income and each step in the process is further explained below.

Net Profit = (Net) Revenue - Cost of Goods Sold - Operating Expenses - Interest Expenses - Taxes

Step 1: Calculate Net Revenue. This step entails gather all revenue sources and factoring in all appropriate items that directly reduce gross revenue such as returns.

Step 2: Calculate the Cost of Goods Sold (COGS). COGS is the cost of producing or purchasing the products that were sold during the period. It includes the cost of materials, labor, and other direct costs. These expenses are only attributable to creating inventory to be sold and do not include administrative costs more geared towards operating a business.

Step 3: Calculate Gross Profit. Subtracting the COGS from gross sales gives you the gross profit.

Step 4: Calculate Operating Expenses. Operating expenses are the expenses incurred to run the business such as rent, utilities, salaries, marketing expenses, and taxes. Again, these are the costs needed to run the business but not necessarily correlated to the production of a specific good that is sold.

Step 5: Calculate the Operating Profit. Deduct the operating expenses from the gross profit to arrive at the operating profit.

Step 6: Calculate Interest and Taxes. Interest and taxes are two expenses that are usually not included as operating expenses. Instead, they are reported below operating profit but are still included when calculating net profit or net income.

Step 7: Calculate Net Profit. Deduct the interest expenses and taxes paid during the period from the operating profit to arrive at the net income.

Example of Revenue vs. Profit

In February 2023, Amazon.com reported its fiscal year 2022 results. The company generated $242.9 billion of net product sales and $271.1 billion of net service sales. Though both of these amounts include contra revenue accounts such as returns, the general direction of these accounts is to report only money earned prior to broader company expenses. For this reason, even though the word "sales" is used on Amazon's financial statements, the company's total net revenue was $514.0 billion for the 12 months ending Dec. 31, 2022.

To bridge from total revenue to total profit, analysts must review the expense side of operations. From the data below, Amazon spent over $288 billion on the cost of goods sold. In total, the company had over $501 billion of total operating expenses omitting expenses such as taxes, interest, or other expenses.

Based on the information above, although Amazon reported $514 billion of revenue, the company did not earn a profit as the company reported a net loss of $2.7 billion. This report highlights the importance of not judging a company's performance solely on the company's revenue. Because the cost structure and one-time expense implications to a company, some companies may report record-levels of revenue though have minimal or no net positive profit.

Other Related Terms

Accrued revenue is the same as unrealized revenue. Accrued revenue is the revenue earned by a company for the delivery of goods or services that have yet to be paid for by the customer.

Here's a hypothetical example to demonstrate accrued revenue. Let's say a company sells widgets for $5 each on net-30 terms to all of its customers and sells 10 widgets in August. Since it invoices its customers on net-30 terms, the company's customers won't have to pay until 30 days later, or on Sept. 30. As a result, August's revenue will be considered accrued revenue until the company receives payment from its customers.

From an accounting standpoint, the company would recognize $50 in revenue on its income statement and $50 in accrued revenue as an asset on its balance sheet. When the company collects the $50, the cash account on the income statement increases, the accrued revenue account decreases, and the $50 on the income statement remains unchanged.

Unearned revenue accounts for money prepaid by a customer for goods or services that have not been delivered. If a company requires prepayment for its goods, it would recognize the revenue as unearned, and would not recognize the revenue on its income statement until the period for which the goods or services were delivered.

The Bottom Line

Revenue and profit are two very important figures that show up on a company's income statement. While revenue is called the top line, a company's profit is referred to as the bottom line. Investors should remember that while these two figures are very important to look at when making their investment decisions, revenue is the income a firm makes without taking expenses into account. But when determining its profit, you account for all the expenses a company has including wages, debts, taxes, and other expenses.