Profit and revenue. Two very important terms used in the business world, and yet they are very different and not to be confused with each other. Whether you are considering starting your own business, or already started you will no doubt come across these terms many times in your life. We’ve broken it down for you in this article so you know exactly what you’re dealing with.
What is revenue?
Revenue is the amount of money received in exchange for the regular sale of your goods or services. To work out the revenue is quite simple
Revenue = number of units sold x sale price.
There are also a few different types of revenue. The Australian Taxation Office goes into more depth on their website.
What is profit?
Profit is the end amount your business makes after taking into account all costs. There are operating costs, invoices from suppliers, potentially rent and wages to pay. Calculating profit considers all of these expenses to give an accurate indication of how successfully and financially healthy your business is.
Profit = revenue – expenses
So profit cannot exist without revenue, meanwhile revenue can exist without profit, and they’re not both positive all the time. Let’s break this down.
You have started a business selling hats online. It’s been one year since operation and you have sold a hundred hats so far priced at $20 each. With these details, your current revenue would equal $2,000.
Now to calculate the profits. Minus the cost of the hats, registration of the business cost, rent for a warehouse, website subscription and any marketing you have done over the year. Now your total profit is actually negative.
It’s quite normal for business to actually make a loss in the first few years. Often you’ll find you may not even be able to break even until the third year or more. This is due to all the start up costs and initial stock purchases that are always going to be higher than normal. Once you’ve settled in, that’s when you can start seeing a profit.
Furthermore, having a good revenue is essential for operating the business and being able to buy all your stock materials and administration fees. Meanwhile, profit is essential for growth and survival of the business.
Gross profit and revenue
So regular profit and revenue is one thing. Gross profit and revenue is now another thing to wrap your head around.
Gross revenue is useful to provide an indication of how well your business can sell the goods over a certain amount of time before deductions. It’s not a good strategy to use when trying to see the financial health of the business. It’s more of an internal measurement. Once expenses are deducted, it’s now known as net revenue.
Gross profit is found by subtracting discounts and returned good as well.
Effectively we have a few different measures to test the financial stability of a business. It’s important that we separate these costs and incomes so we can better determine problem areas. They are also crucial when you decide to sell or buy a business. You need to see these details before making your decision to see how much the business is worth and if it’s worthwhile at all.