Monthly Archives: May 2017

Revenue Vs Profits- Know the Differences

For entrepreneurs venturing into business, the primary focus is to generate revenues as fast as possible. Revenues, also called “sales,” are important for any growing business looking to gain a toehold in the competitive market. As time passes, however, the new company will need to generate profits if at all it has to stay in business- that’s why it’s important to know the difference between revenue and profit.

Any company can experience growing revenues every month, but if it cannot produce them profitably, sustaining this growth will be a difficult task. This demonstrates the main distinction between revenue- the cash your business collects, and the profits-the amount left over after all your business costs are covered. Perhaps, a deeper dive into the details of what you need to know on revenue and profits can help make financial management more efficient.

Revenue

Revenue is the amount your business gains from selling its goods or services. Sometimes a company can generate additional unearned revenue from fees, interests, and royalties (e.g. the interest you earn on the cash in your bank account). Assuming a large percentage of the revenue you generate comes from selling products or services, it is recorded as received in money or as invoiced. If you happen to invoice a consumer for goods worth $15,000, it is recorded as revenue. At month end, quarterly or yearly you record your revenue on top of your income statement before costs and expenses.

Profits

Profits are the cash remains after deducting expenses incurred for generating the revenue. If you spent $10,000 on paying staff and production and earn $15,000 on goods sold, you make a profit of $3,000. However, it doesn’t end there; you will also need to work out your “gross profit” as well as “net profit” to have a bigger picture how your business is performing.

Gross Profit: This is the result of revenue minus the direct cost of production of goods or services. Direct costs here refer to funds that go into a product or the staff expenditure into a service.

Net Profit: This is the result of revenue less direct cost of production of goods and services less all other business costs (e.g. rent, payroll, utilities, rent, and taxes).

While gross profit helps you determine how efficiently your business is performing regarding producing goods and whether you are pricing suitably. Net profit is the bottom line result of what your company has left over to invest back in the business.