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Revenue versus profit. How are they related? How are they different? How is each used in a company's financial reporting?
The answers to these questions are key for anyone in accounting, finance or FP&A to know inside and out and be able to communicate clearly to non-finance stakeholders at their organization.
In this guide we'll define each term in detail and walk through the specific types of revenue and profit calculations companies use in their financial reporting. We'll also discuss the key differences between the two and why they matter.
When you're finished reading this guide, you'll have a clear sense of how finance teams use revenue and profit to understand the financial health of their organization and make strategic decisions for its future.
Revenue is the amount of money a company generates before subtracting expenses. Its 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 organizations cash flow.
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 formulas companies use in their financial reporting include:
Profit is the amount of money earned after expenses are deducted from revenue. It is also referred to as the bottom line and appears as net income on financial statements.
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.
Net revenue is revenue earned after allowances are deducted such as discounts and returns. 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.
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.
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. Its calculated by multiplying the total number of active users in a given month by the ARPU.
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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.
Companies generally calculate gross and net profit. Gross profit is the total profit earned after subtracting the costs of goods sold (COGS). It's calculated by subtracting COGS from net revenue.
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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.
Increasing revenue and increasing profit are two important goals for any business, but they require different strategies and considerations. Here's a summary of how to increase each.
To boost revenue, you can focus on the following key areas:
To increase profit, focus on the following strategies:
In short: Increasing revenue is typically achieved through scaling and expansion efforts, while boosting profit is done through process, product and pricing optimization. It's important to note that increasing revenue does not guarantee increased profit, as it may come with higher costs.
Therefore, businesses should aim for a balanced approach that considers both revenue growth and profitability to achieve long-term success.
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 and time when it's being measured. To understand why, it's important to know what each metric indicates about a company's financial performance.
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.
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.
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 prioritize revenue growth to capture market share before focusing on optimizing profitability.
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 track at all times, even if one may be prioritized over the other as a company grows and evolves.
Let's consider some household-name companies to help demonstrate the difference between revenue and profit, and more specifically, why the importance of each evolves over the lifetime of a business.
Back in 2004, Facebook was a brand new startup launched in a Harvard dorm room by then-sophomore Mark Zuckerberg. Over the next few years, Facebook continued to evolve, earn funding and revenue, but also spend money at a rapid rate.
They invested in new features and advertising partnerships, and expanded their user base rapidly to gain social network market share and grow their popularity outside of its original college-student demographic.
Facebook didn't turn a profit until 2009, five years after its original founding, when it earned $229M in profit on $777M revenue.
Because it was a young and innovative company with a clear user growth trajectory and plan for the future, Facebook was considered financially viable even when it wasn't actually profitable. By 2011, it reached $1B in profit.
Image source: Tech Crunch
Established companies, however, don't have the luxury of allowing themselves to operate at a loss without investors and customers alike questioning their financial health, leadership decisions and overall long-term future.
To drive growth, they have to focus on ways to increase profit margins. This often requires increasing prices, which is happening right now as corporations in every industry work to combat inflation pressures. According to The New York Times, companies such as PepsiCo are boosting product prices in anticipation of continued economic uncertainty.
This isn't ideal for customers, of course, but it allows corporations to continue operating at a profit and invest in planned initiatives without hurting their bottom line.
Your company's revenue is the total amount of money your company earns, and your profit is whats left over after your expenses. Revenue focuses primarily on money earned from the sale of goods and services, while profit involves a more comprehensive assessment of expenses from across your organization.
The importance of each of these metrics may evolve and change as your company does the same. For new and growing companies, revenue takes priority because scaling and achieving profitability is impossible without it.
For established companies, profit is the ultimate measure of financial performance because it highlights how well your organizations leaders are managing revenue and budgets.
In the end, neither revenue nor profit alone can give a complete enough picture of an organization's finances to inform strategic decisions and in practice, revenue and profit are complementary pieces to the same puzzle.
When evaluated together, finance teams can obtain the most complete and accurate view of their company's financial position.
Today's business world moves fast and finance teams need automated, scalable solutions to help them keep up. Using revenue planning software makes it easy to track revenue and profit continuously versus periodically and gives you real-time insights into the financial state of your organization whenever you need it.
Vena provides the flexibility of Excel and the structure of a controlled application environment in a single unified platform. With an Excel interface and OLAP cube technology, Vena is the only cloud-based solution that seamlessly integrates and secures financial data from all your sources.
Did you find this article helpful? You might also enjoy this related content:
How To Find New Revenue Streams From Your Analytics
A Guide to Profitability Analysis
10 Metrics To Measure the Financial Efficiency of Your Organization
Learn how to align finance, marketing and sales teams for flexible revenue forecasting that will help your business quickly adapt to rapidly changing business conditions.
