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Revenue Vs. Profit: Important Differences You Need To Know

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Synopsis:

Revenue and Profit are two financial aspects of a company that can help investors determine if a company is worth investing in. Here is your low-down on everything revenue vs profit to help you make the best decision.

Understanding the Basics: What is Revenue?

Often referred to as the ‘top line’ since it sits at the very top of an income tax statement, revenue is basically the income a company generates prior to the deduction of any expenses. 

  1. Companies mostly report gross revenue or net revenue. 

  2. The gross revenue of a company is the income it makes from sales before any discounts on the price or returns are made

  3. The net income of the same company will be calculated when all the residual sale items are counted as well 

  4. Net revenue is not inclusive of the expenses or expenditures of the company. 

  5. Net revenue is only the total revenue inclusive of certain aspects that may reduce the amount.

Breaking Down Profit: Types and Definitions

Profit is the money that a company ends up with after factoring in all expenses. These expenses might include things like:

  1. Operational costs

  2. Various taxes 

  3. Any asset depreciation or simply put any reduction in the value of an asset. 

Profits are also inclusive of any income from non-business activities like interest or rent. 

Three types of profits help determine different kinds of incomes:

  1. Gross Profit

    • Calculated by deducting the cost of goods sold or COGS from the revenue of the company 

    • COGS includes direct costs paid by the company. 

  2. Operating Profit

    • Companies have to bear operating costs that can include rent, marketing, advertising, etc. 

    • The operating profit is calculated by subtracting these operating costs from the gross profit

    • Operating profit does not include interests or taxes 

    • Any income from the sale of assets is also not considered in operating profits. 

  3. Net Profit

    • Net profit is inclusive of the consideration of taxes, interest on loans, one-off payments, etc.

    • Net profit also takes into account potential cash inflows from nonbusiness operations like any sale of assets and investments

    • The net profit is also considered a company’s bottom line.

Additional Read:  What is Trading Account: Definition, Types & Benefits

What Impacts Revenue?

Here are some of the main factors that impact the revenue of the company:

  1. When a company's products or services are in high demand, the company’s revenue increases. 

  2. When a decrease in demand is there, the revenue of the company will also decrease. 

  3. The pricing a company decides to keep also affects the company's revenue. 

  4. This is why a company should set the price of its goods or services at a reasonable price, as it can lead to a decrease in demand and thus revenue.

  5. When there is external competition and it affects the company's market share, it will affect the company’s revenue too. 

  6. Economic conditions like recession will also affect the company revenue as there is less consumer spending.

What Impacts Profit?  

Here are some of the main factors that impact the profits of a company:

  1. Factors that impact the revenue of a company also impact its profit

  2. This is because the profit of a company is ultimately a component of its revenue.

  3. When there is an escalation in the cost of goods sold, the profits of a company are affected negatively.

  4. However, if a company manufactures goods efficiently, profits can increase without changes to the revenue.

  5. Reduction in operating expenses can increase profits

Key Differences Between Revenue and Profit

Here is a list of the key differences between revenue and profit:

Revenue

Profit

Money earned by a company from its operations

Money earned by a company after subtracting its expenses

Can be found at the very top of an income statement

Can be found at the bottom of the income statement most of the time

When setting manufacturing expectations, companies usually look at their revenue

When looking to allocate capital in the future, companies consider their profits

Revenue is calculated by considering only the money taken in

The profit of a company on the other hand is a combination of inflows and outflows

Revenue projections help forecast the quantities of goods that can be sold and help stock up the inventory

Strong periods of profit help a company decide to invest more in its growth. Inversely low profits can make a company decide to build reserves

The revenue of a company is often affected by the company’s annual market performance

Profit, on the other hand, is more susceptible to changes in accounting rules.

Why Understanding These Differences Matters for Investors

Revenue and profit are both important financial makers for investors to consider when they are looking to invest in a particular company. Here are some of the reasons why knowing the difference between the two is important:

  1. The revenue of a company can determine its size and scalability, its demand in the market and its market share among other things

  2. Revenue can also indicate the growth potential of a company and this can help attract investors

  3. The profit of a company helps in determining its viability and efficiency

  4. Investors can gauge how sustainable a company can be in the long run by analyzing how the company heads are managing its funds and staying profitable at the same time. 

  5. If a company has a high profitability market, it can invest better in R&D, influencing the valuation of its stocks and thus attracting more investors

Calculating Revenue to Profit  

There are several involved when calculating revenue to profit. However, let us have a look at the basic formula for calculating net profit for a company 

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

Below is a list of all the steps needed to calculate revenue from profit. 

  1. Calculating the Net Revenue: To calculate the net revenue of a company, all revenue sources need to be gathered. All items that directly reduce gross revenue like returns should also be taken into account.

  2. Calculating the Cost of Goods Sold or COGS:  The cost of goods sold includes the cost of producing or purchasing the products sold during a particular period. This can consist of the cost of materials, labour cost, etc. They do not include administrative costs.

  3. Calculating the Gross Profit: The gross profit can be obtained by subtracting the cost of goods sold or COGS from gross sales

  4. Calculating the Operating Expenses: A combination of all the expenses incurred by the company to run the business like rent, salaries, marketing expenses, taxes etc is the operating profit of a company. 

  5. Calculating the Operating Profit: Operating expenses subtracted from the gross profit will result in the operating profit.

  6. Calculating Interest and Taxes: Usually not included as operating expenses interest and taxes are still included when calculating net profit or net income.

  7. Calculate Net Profit. Any interest expenses and taxes paid in a particular period from the operating profit will provide one with the net profit.

Additional Read:  Difference between Sensex and Nifty

Conclusion

Both revenue and profit are extremely important financial figures that are a part of any company’s income statement. Investors should remember to look at the revenue of a company as the income the company makes exclusive of the expenses of the company. Profit on the other hand accounts for the expenses a company incurs like wages, taxes, debts, taxes etc. This will help investors determine which aspects of a company to look at when they are planning to invest in it.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

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Frequently Asked Questions

What is the primary difference between revenue and profit?

Answer Field

Revenue is the money earned by a company from its operations while profit is the money earned by a company after subtracting its expenses

How can revenue be high but profit be low?

Answer Field

The increase in different costs can result in higher revenue but lower profits

Why is it important to differentiate between revenue and profit?

Answer Field

Knowing the difference between the two helps know and gauge the financial health of a company better.

Can a company survive with high revenue but no profit?

Answer Field

Even if a company is generating a lot of revenue but no profits it will still be considered successful as the high revenue shows that the company invests heavily in growth, innovation, or market capture.

What are some common expenses that can affect a companys profit?

Answer Field

Operating expenses that are used to help run the company can end up affecting a company’s profits. These could include rent, salaries, marketing expenses, taxes etc. 

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