Though frequently mentioned in the same breath, revenue and profit serve distinct roles in painting a comprehensive picture of a company's financial health.
In short, revenue is the money your company generates before expenses, while profit is the money left over after expenses have been deducted. Each of these metrics can tell you different things when it comes to understanding the business’s financial performance.
Key Takeaways
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Revenue, sometimes referred to as “top line,” is the amount of money a company earns before expenses. Commonly used revenue formulas are gross revenue, net revenue, average revenue per unit, monthly recurring revenue and annual recurring revenue.
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Profit is the money left over after expenses are deducted from revenue earned. A common term that is sometimes used when discussing profit is Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). Profit is sometimes referred to as “the bottom line”.
What Is Revenue?
Revenue is the amount of money a company generates before subtracting expenses. It’s also referred to as the top line because it appears at the top of an income statement and is the starting point for analyzing an organization’s cash flow.
Revenue is important because it is a key indicator of market demand, business scale, and growth trajectory.
Revenue is generally focused on money earned from the direct sale of goods and services and not income from other sources (such as IP ownership or rental properties).
Types of Revenue
Some of the metrics businesses use to measure revenue include:
How To Calculate Revenue
Gross Revenue
Gross revenue is the most straight forward type of revenue calculation. It's the total revenue you earn from all sales. Gross revenue is calculated by multiplying sales volume by sales price per unit.
Gross Revenue = Total Sales Volume × Sales Price Per Unit
Net Revenue
Net revenue is revenue earned after allowances such as discounts and returns have been deducted. This number gives you a clearer picture of actual earnings versus simply calculating money coming in. Note that net revenue only deducts expenses related directly to the sale of goods.
Net Revenue = Gross Revenue − Directly Related Selling Expenses
Average Revenue Per Unit/User/Account (ARPU)
Average revenue per unit/user (ARPU) or account (ARPA) is the revenue earned from the sale of a single unit sold or single contract account closed. It's calculated by dividing your total revenue by the number of users/accounts during a given time period.
Average Revenue Per User = Total Revenue ÷ Number of Users/Accounts During a Given Period
Monthly Recurring Revenue (MRR)
Monthly recurring revenue (MRR) is a benchmark metric used by SaaS companies and other subscription-based businesses to track predictable revenue on a monthly basis. It is calculated by multiplying the total number of active users in a given month by the ARPU.
Monthly Recurring Revenue = Average Revenue Per Account × Total Number of Active Monthly Users
Annual Recurring Revenue (ARR)
Annual recurring revenue (ARR) is similar to MRR but calculates predictable revenue on an annual basis rather than a monthly one. It's calculated by multiplying the MRR by 12.
Annual Recurring Revenue = (Average Revenue Per Account × Total Number of Active Monthly Users) × 12
What Is Profit?
Profit is the amount of money a company earns after expenses are deducted from revenue. It is also referred to as the bottom line and appears as net income on financial statements.
Profit is important because it is an indicator of a business’ financial health, efficiency, and sustainability. And of course, profit allows companies to grow, invest in technologies to drive efficiency and hire new people, to name just a few benefits.
Types of Profit
Some of the metrics businesses use to measure profit include:
How To Calculate Profit
Gross Profit
Gross profit is the total profit earned after subtracting the costs of goods sold (COGS) from net revenue.
Gross Profit = Net Revenue − Cost of Goods Sold
Operating Profit (or EBIT)
Operating Profit is similar to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) but Operating Profit does not include depreciation and amortization (which is why it can also be referred to as EBIT).
Operating Profit = (Net Revenue − Cost of Goods Sold) − Operating Expenses − Depreciation − Amortization
Net Profit
Net profit accounts for all other operating expenses and is calculated by subtracting these expenses which can include rent and utilities, marketing and advertising, salaries, accounting, vendor payments and more from gross profit.
Net Profit = Operating Profit − Taxes, Interest and Other Costs
Key Differences Between Revenue and Profit
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Total earnings before expenses
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Money left after all expenses are deducted
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Appears on Financial Statement
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Top line of the income statement
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Bottom line of the income statement
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Business scale and growth
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Business efficiency and sustainability
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Market expansion, sales growth
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Cost control, efficiency and pricing optimization
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Revenue vs. Profit: Which Should Businesses Prioritize?
Revenue and profit are both essential financial metrics to measure, but the importance of each to a particular business can vary based on its size, maturity, current goals and the specific point in time when it's being measured. To understand why, it's important to know what each metric indicates about a company's financial performance.
Every business is different, and there is no “one size fits all” answer as to whether your business should prioritize revenue above profit or vice versa. However, there are some guidelines— guardrails, if you will—that apply to most businesses.
In general, for mature and stable companies, profit is the ultimate indicator of financial health.
However, revenue is an essential precursor to profitability, particularly for young or growing companies that may want to prioritize capturing market share before focusing on optimizing profitability.
When To Focus on Revenue Growth
Focusing on revenue growth is typically a good strategy for startups, high-growth companies, and companies seeking market expansion. Think of the old adage “it takes money to make money.”
That is because revenue indicates the size and scale of a business, market demand, market share, sales volume and growth potential. It can be used to attract investors and secure financing, and it provides a foundation for strategizing about future profitability.
When To Focus on Profitability
Profit measures a company's efficiency and viability. It reflects the long-term sustainability of a business based on how its leaders are managing funds to stay profitable. Maintaining high profitability enables reinvestment in R&D and other new growth opportunities, and it also influences a company's valuation to attract investors.
This is why mature businesses and companies undergoing investor scrutiny tend to focus on profitability.
Also, it is wise for most companies to focus on profitability during economic downturns.
Balancing Both for Long-Term Success
Ultimately, the ideal balance between revenue and profit depends on the specific goals, industry and life stage of the company. Thats why both metrics are crucial to always track, even if one may be prioritized over the other as a company grows and evolves.
As an FP&A professional, it’s your job to support the business in finding the right equilibrium based on industry, lifecycle, and strategy.
How FP&A Software Can Help
Using FP&A software makes it easy to track revenue and profit continuously versus periodically, with real time data access to give you insights into the business's financial health whenever you need it.
With an Excel interface, backed by a powerful central database and AI technology, Vena helps you make decisions faster by giving you access to the insights you need without the manual spreadsheet work.
