There is much confusion around revenue vs profit as most business coaches and experts speak to the importance of revenue, but it feels few are encouraging you to pay close attention to your profit line. In this article we are going to define revenue vs profit, lay out the differences between the two, and tell you which is more important and why.
Often you hear business owners and entrepreneurs talking about their 7-or-8-figure businesses, bragging about their revenue numbers, but I often wonder what their profit is. These high revenue numbers are impressive, but if there is no profit to back up those high revenue numbers, I am not impressed.
When you break down the numbers behind the revenue you may be surprised to see the expenses that go into creating those high revenue numbers. I have been a CPA for over 20 years, and I have worked with many companies, and I have also seen many 7-to-8-figure businesses fail due to poor financial management.
We need to be talking more about profit. I really want to help business owners optimize the profit in their businesses so they can keep more money in their pocket, increase their net worth, and stay in business for the long term.
What is revenue?
Revenue is all the money that your business is earning, from sales to passive income. When you are in business you are operating to incur revenue through the product and/or services that you are selling. You need revenue coming in the door regularly to ensure you stay in business however revenue alone will not resolve a cash flow issue.
Revenue sources
Your operating income will come from the sales of the products or services that you offer in your business.
When your business has gained momentum and starts to invest in other areas to get your money working for you, you will be generating other types of income such as Interest income and dividend income. These types of income generally come from investing in financial instruments such as stocks and bonds.
If you decide to branch out into real estate ownership, you may receive rental revenue from the properties that you rent out.
Royalties are another type of income for when you own intellectual property such as books or music and you receive a percentage of sales when that piece is sold.
These are just a few examples of the different types of income you may receive in your business, and there are many other ways your business can diversify its income. The limit is to your creativity.
What is profit?
Profit is Revenue – Expenses = Profit Before Taxes
Profit is the money that your business gets to keep after it has paid its expenses. If you are 100% owner of the business, profit is the money that you get to keep.
Profit is the money that is left to you after all the expenses in the business have been paid for that time period. Profit is what you get taxed on, and if you are a sole proprietor of your business, profit after taxes is what you get to keep in your business at the end of the day.
Profit is desirable because revenue numbers mean nothing if you don’t have profit attached to it. Businesses are in business to create profit, and if you want to grow and scale your business, you need profit to reinvest in your business to grow at a consistent and safe speed.
Types of profit
There are two types of profit: gross profit and net profit. Gross profit is the revenue less cost of goods sold. Net profit is the all the revenue earned less all the expenses paid out, including overhead, and that equals net profit.
What are profit margins?
Profit margins are ratios that determine how the business makes money and with how much effort. There are gross profit margins and net profit margins. Like the types of profit there are (gross profit and net profit), there are the profit margins to calculate the ease into which it takes the business to produce profit based on their sales numbers.
Which is better: revenue or profit?
You need revenue to incur a profit, but without profit your revenue numbers mean nothing. While revenue is absolutely essential in business, you need to create profit to keep you in a positive cash flow.
When you generate revenue, but you are paying out more in expenses than the revenue you are bringing in, essentially your business will fail when it runs out of cash to keep it going.
The bottom line is revenue and profit have a complicated relationship, because without revenue there is no profit. However, if you are not producing a profit in your business then consider that a red flag. You need profit in your business, especially if you want to grow and scale your business.
Net profit margins for a business need to be healthy to consider them to be a good business investment should you decide to sell your business someday. There are few solid arguments as to why revenue is better than profit, but both are valuable in their own way.
As I operate my business, I put an emphasis on profit and command high net profit margins in my business because I know that the net profit (less taxes) is the money I get to reinvest into my business as I grow and scale my business.
Knowing how to build your wealth as a business owner is the best strategy for your business and personal finances. You are in a unique position as a business owner to create wealth for yourself, and if you are not taking advantage of that opportunity yet, I highly recommend it.
