One question we are often asked by our clients when they start up a new business is: “What is the difference between revenue and profit?” In this article, we have broken down both phrases and explained why they are both vital processes to a business.
Revenue is the measurement of sales transactions that the business makes when it sells its services or goods to another business or individual.
While the majority of revenue will usually come from the sale of goods and services, a business can earn other types of revenue such as interest income or rental income.
Companies will often focus on sales revenue growth as a measure of business success, as it is the first number most will see when analysing a set of accounts.
However, in the majority of cases income is generated after incurring costs, this is to make sure that the revenue is delivered. It is only when we deduct these costs that we begin to see the true success of a business in the profit figure.
Profit is determined in two terms – gross profit and operating profit.
Gross profit is derived after deducting any costs that are directly attributable to sales. An example of this would be, the cost of the materials and labour to manufacture a product, which is then sold to the business’ customers.
Operating profit is calculated after all costs of the business are deducted including indirect costs such as rent, accountancy fees and marketing expenditure.
Gross profit is a great way to understand how well the business is performing when deducting variable costs that fluctuate with sales. A business will need to achieve a required gross profit level in order to cover the overheads of the business, followed by producing a profit for the shareholders.
Revenue vs profit: Which is more important?
Both revenue and profit are vital to business owners and investors however, they each have their own differences. Revenue growth will often show the demand for a business’ product or service and whether it is something worth investing in. Nevertheless, the profit of a business shows how well the operation is being managed, and if costs are being monitored and kept under control.
Both of these numbers should form a key part of your business’ KPIs being measured, with any anomalies identified and acted upon with equal importance.
If you’re in need of more business advice, check out our contributions to Revolut’s Business 101 page: blog.revolut.com/tag/business-101/
We work with Revolut to save our clients time and money, making things simple for both employees and business owners. Find out more on how Revolut could benefit your business here: https://link.revolut.com/2yTS72IAP6