A business entity always focuses on increasing revenue, because it is the revenue which decides its fate. In addition to this, the profit of the company also greatly depends on the revenue earned. For earning profits, revenue should always be more than the cost of inputs, or else the firm would not be able to survive in the long run. Revenue is the proceeds which a firm earns from different activities, in a particular period.
On the contrary, profit, as we all know, is the surplus of income over the expenses. So, both are equally important for the company for its long-term survival, growth, and expansion, as revenue is the backbone, then profit is the lifeblood of the business. Furthermore, the company’s revenue and expenses are in direct relationship with one another, i.e. the higher the revenue, the greater is the profit and vice-versa.
Take a read of the given article to understand the differences between revenue and profit.
Contents: Profit Vs Revenue
|Basis for Comparison||Profit||Revenue|
|Meaning||Profit implies the surplus amount left, after deducting cost of inputs, expenses and taxes from the revenue, in a given period.||Revenue refers to the proceeds from the sale of goods, delivery of services and other activities, such as interest earned on securities, commission received, etc. in a given period.|
|What is it?||Reward for bearing risks and uncertainties.||Earnings from the activities undertaken.|
|Interdependence||Profit is dependent on revenue.||Revenue is independent of profit.|
|Necessary for||Business survival, growth and expansion in the long run.||Carrying out day to day activities and purchase of assets.|
|Income Statement item||Bottom line||Top line|
Definition of Revenue
Revenue can be understood as the proceeds received by the company from its primary and subsidiary business activities in a given period. Meaning that the income generated by the company on account of sale of goods or delivery of services or any other use of company’s capital or assets in connection to its primary business activities, prior to the deduction of any costs or expenses, will be termed as revenue.
The revenue is generated from the sale of merchandise or delivery of services, is regarded as a “Turnover”. In the Income statement of the company, the revenue appearing on the top line is its sales revenue/service revenue (as the case may be) for the concerned period, from which the cost of inputs, expenses, interest on debt and taxes are deducted to determine the net profit.
Revenue is the lifeblood of the business because it helps in meeting the fixed and variable expenses of the firm. It helps the company to run its business effectively and efficiently. It can be of two types:
- Operating revenue: The revenue generated from the company’s core business operations or say day to day activities, i.e. the sale of goods and provision of services to its customers/clients.
- Non-operating revenue: The income generated through other activities of the business which are undertaken side by side is called non-operating revenue. These are non-recurring in nature, as well as they can’t be predicted – whether the revenue will be generated or not. It may include the sale of assets, sale of scrap, commission received, interest received, dividend received, rent received etc.
Definition of Profit
In simple words, profit is the financial gain. It is the return for the risk taken and the money spent in commencing and operating the business. The portion of the company’s revenue left after subtracting all the cost of material, labour, machinery, rent, interest on borrowed capital and taxes, is called Profit.
In other words, we can say that it is the surplus amount which is attained when the income earned from the business operations is greater than matching expenses for the period.
The profit earned is the reward for the business owners. It is essential for the growth and long-term survival of every business, in fact, the success of the business relies only on its profit-earning capacity. All the stakeholders are interested in knowing the profits made by the company in the given period.
Profit is obtained after deducting the production costs, overheads, interest and taxes involved from the Revenue earned in the concerned period. Profit is divided into three categories:
- Gross Profit: The profit arrived at, after subtracting all the costs related to the production of output or provision of services is called gross profit.
- Operating Profit: The profit remained after deducting operating expenses but prior to the deduction of interest and taxes is called as operating profit. Here operating expenses implies the expenses incurred for undertaking normal business activities but are not directly related to production. These include office and administration expenses, selling and distribution expenses, etc.
- Net Profit: The amount left after deducting all the costs, expenses, interest and taxes from the revenue is described as the net profit.
Key Differences Between Revenue and Profit
The points given below are substantial so far as the difference between revenue and profit is concerned:
- Revenue means the total money earned by the company, through various activities, i.e. trading and non-trading business activities, calculated over a specified period of time. On the other hand, Profit refers to the money remained from the company’s revenue after subtracting all costs, expenses, interest on debt and taxes.
- In the simplest sense, revenue is the income generated by the company from undertaking different activities. Conversely, profit is the reward to the entrepreneur for undertaking risks and uncertainties and investing the time and efforts for operating business.
- It is to be noted that revenue is not dependent on profit, it is just the total money brought in, to the company by carrying out different activities. Conversely, profit is highly dependent on revenue, i.e. until and unless the firm does not earn sufficient revenue, it will not start making profits. So, it can be said that profit is directly proportional to the revenue.
- For the ultimate growth of a business, revenue is must because without it the company is not able to earn any kind of profit. Hence it is essential for running a business efficiently and effectively. In contrast, Profit is the basic requirement of the company, which decides its future and also help it to survive and grow in the long run while meeting the contingencies.
- Sales Revenue or Service Revenue appears as the top line item in the income statement. As against, Net Profit appears as the bottom line item in the income statement.
ABS Ltd. is a multinational company which deals in cars. The money earned by the company from the sale of cars and services provided thereon in a financial year will be regarded as its Revenue. Now, when the revenue generated from the sale of cars and provision of services is greater than the total money spent on the production of cars, manpower, logistics, advertising, rent, taxes and so forth, then the amount will be company’s Profit.
No matter if it’s a small grocery shop at the corner of the street or a big multinational company operating in various countries, the basic aim is to make money, because it is the fundamental requirement to keep the business going. Without money, the business won’t be able to stand for a long time.
Therefore, it is very important for any business to earn revenue which not just cover the costs involved but also reaps good profit, which ultimately helps in building the reputation, goodwill, business network and market share.
In a nutshell, Revenue is what the business entity earns through its day to day operations, i.e. from the sale of goods or rendering of services to the customers. On the other hand, Profit is the financial gain which arrives when the money earned from the sale of goods exceeds the money invested in buying or producing goods.