When analyzing a company’s financial statements, you’ll often come across two different measures of profitability: net profit and revenue. But here arises the next question: What is the difference between profit and revenue? These two key performance indicators (KPIs) are both included into standard accounting reporting and are often confused.
While both metrics are useful in their own right, they provide very different insights into the performance of a company.
Let’s explore the net profit vs revenue differences and understand their roles in the financial statement.
What is revenue and is it different from the net income?
Sometime, revenue vs income difference may be unclear both for business owners and their accountants. Let us clarify the definition of revenue.
Revenue function is used to show the total amount of money that a company receives from its customers for the goods and services it has provided. While the revenue formula is usually calculated on a quarterly basis for internal reporting purposes, it can be reviewed at any time by breaking out each revenue source individually.
Revenue definition is typically broken out into two main categories: primary and secondary.
- Primary revenue refers to sales from the company’s core business operations.
- Secondary revenue streams are related services or products outside of the main business.
In accounting, revenue is also referred to as “net sales” when providing information about sales performance. Net sales represent the total amount of money brought into a business after removing a few things: returns, sales allowances and sales discounts.
What is deferred revenue?
Deferred revenue definition is an accounting entry that a company records when it sells goods or services but doesn’t receive payment for these goods or services at the time of sale. In other words, it’s money collected on some future date in exchange for goods or services.
For example, if a company sells software licenses and pre-sells them with a discount, then the cash received from customers will be recorded as deferred revenue until the time period expires. It’s essentially prepayment for goods or services to be delivered at a later date.
A company will receive money from customers before the service or product has been delivered and the customer has no obligation to pay anything else at that point. Therefore, this money needs to be recorded somewhere so that it can be included into future financial statements.
If a company doesn’t plan to deliver on its end of the bargain, it should record this as some form of liability (e.g. account payable) because it will need to return that money later on.
However, if the company plans to deliver on its end of the bargain, it should record this as some form of equity (e.g. an increase in another asset such as prepaid expenses) because the customer won’t be able to cash in on their investment until they fulfill their part of the deal later on.
The opposite of the deferred revenue formula is accrued revenue – the product or service is yet to be paid by the customer.
Note: operating profit
Another point to understand when doing accounting for business company is the operation profit.
A company’s operating profit is its total earnings from its core business functions for a given period, excluding the deduction of interest and taxes.— Investopedia
|Operating profit = revenue – operating costs – cost of goods sold (COGS) – other day-to-day expenses|
How to calculate revenue for the business
Given all the different revenue function streams available to businesses, it can be difficult to know which is the right one to focus on. But as with most things, there’s no universal answer; it all depends on your business and its specific circumstances. Here, we’ll take a look at the two revenue formulas: product sales (e-commerce) and service companies (SaaS).
How to calculate revenue for e-commerce businesses income
As an e-commerce business, you can calculate revenue if you multiply the average price of a unit by the total number of units sold in a given period. The formula you’d use is:
|Revenue = average price x total number of products sold|
How to calculate revenue for SaaS company income
If you’re a SaaS business, you multiply the total number of customers you have by the average price of your services. The formula looks like this:
|Revenue = total number of customers x average price of services|
The alternative option is to use a software that’ll calculate all the important metrics for your business automatically. Check examples of business insights to learn more about how you can get a business health overview in just a few clicks.
What is net profit?
Net profit is the bottom line of a business. How to find net profit? It’s the amount that a company keeps after deducting all operating expenses from the gross profit. Net profit can be a good indicator of how successful your business is because it reveals how much value your company created through operating activities.
For example, if your company loses $1 million but makes a final profit of $500,000 in total then its net loss is $500,000. However, if it makes a final profit of $50,000 then its net profit is just $50,000.
Once you understand that net profit is just the operating side of your business, it becomes easier to see where net profits come from and why they can signal that you have a healthy balance sheet and strong cash flow.
How to calculate net profit for the business
As it was said before, net profit is the final result of an accounting process. It shows how much money came in and how much went out during the period being analyzed. It represents the difference between revenue and expenses.
Here is the formula for how to find net profit:
|Net profit = total revenue – total expenses|
Here is where to find all the expenses in Synder’s Profit and Loss statement:
What is the difference between profit and revenue?
Summing up the information above, now we can compare and define net profit vs revenue differences.
Revenue vs net profit difference #1. Position in the report
- Revenue: stands at the beginning – the first (or top) line.
- Net profit: stands at the end – the bottom line.
Revenue vs net profit difference #2. Dependence
- Revenue: doesn’t depend on net profit.
- Net profit: depends on revenue.
Revenue vs net profit difference #3. Which is higher/which is lower
- Revenue: is always higher than the net income.
- Net profit: is always lower than revenue.
Revenue vs net profit difference #4. Calculation
- Revenue formula: income + expenses.
- Net profit formula: income – expenses.
Bottom line: net profit vs revenue – the main point to remember about the income and expenses
Net profit or revenue alone isn’t enough to tell you how well your business is doing. You need to look at other key performance indicators (KPIs) such as cash flow, operating expenses, and inventory metrics to get a complete picture of how well your business is doing.
To learn more about KPIs and metrics check out the guide to marketing metrics and Synder Insights. This feature is a set of instantly generated reports based on data that Synder captures from connected e-commerce platforms and payment gateways, such as sales, customers, products, payment processing fees, etc.
Get a full picture to create a profitable business strategy based on your real numbers!