The Relationship Between Revenue And Profit

While making a company could make huge profits, there are a lot of other factors that are responsible for the company’s eventual success.

When assessing the success or otherwise of a company, two main things that are considered are revenue and profit. While they both show the operating success or failure of the company, and by virtue of this, the earning capacity of the stock, they are both different.

Let’s say a company that produces belts makes about 10 million annually. However, after all expenses, operating costs, and loans have been removed, the company is left with no money in its account.

The resulting effect is that such a company has a net loss and has made no profit. This is the basic difference that exists between revenue and profit.

While revenue has to do with the total amount a company is able to make from the sales of goods or services, profit refers to the remaining income after every debt, expense and operating cost have been deducted.

It is easy to confuse both terms and get things complicated because they both have to do with the income a company generates. Despite this similarity, they remain different.

REVENUE

Revenue lies at the top of the income statement. It is also referred to as “sales” or “turnover” since it has to do with the money a company generates from making sales.

In relation to a company’s primary operations, revenue is what the company earns from selling its goods or services. Costs of operation and other expenses are not deducted from a company’s revenue.

For example, the belt company above make their revenue solely from the sales of belts, without adding other streams of income, or deducting expenses. So, if this company gets income from other investments or a subsidiary firm, such income is not added to the revenue. They are under separate accounts.

Accrued Revenue

This is also known as unrealized revenue. It is the revenue a company earns from delivering goods or services that the customer is yet to pay for. For example, if the belt company sells 10 belts to 10 customers, and those customers are to pay at a later date, the revenue from these belts would be considered accrued revenue until the customers pay.

This means that the company would recognize the income made from the sales on its income statement, and would record that amount as accrued income as assets on the balance sheet. When the customers finally pay, there would be a decrease in the accrued income account while the income statement remains the same.

Unearned Revenue

This is not to be confused with accrued revenue as it means the opposite. Unearned Revenue is the money a customer pays for goods or services that are yet to be delivered.

PROFIT

This is generally referred to as the bottom line. It appears at the bottom of the income statement, and it has to do with the generated income that remains after all debts, expenses, operating costs, and additional streams of income have been deducted.

A company could either make a profit or a loss, even if such company is generating a huge amount of income. On the income statement, the profit is referred to as net income.

The income statement has various types of profit used in analyzing a company’s performance. There are also other profit margins existing between the revenue and the profit, known as the top line and bottom line respectively.

The word, “profit” can either be used to refer to gross profit or operating profit, which are steps adding up to the net profit.

Gross Profit

This is gotten by subtracting the cost of goods sold from the income generated. The costs of goods sold (COGS) are direct costs in relation to the production of goods and services.

Operating Profit

This is gotten by subtracting other expenses from the gross profit. This expense could either be fixed or variable expenses, including rent, salaries, and utilities.

While making a company could make huge profits, there are a lot of other factors that are responsible for the company’s eventual success. It is, therefore, important to review both revenue and profits before investing in any stock.

Written by Lawretta Egba.