- What is profit?
- What is revenue?
- Profit vs. revenue: which is more important?
- Modern digital solutions to the profit vs. revenue debate
Q: When considering profit vs. revenue, what should my business be the most concerned about?
A: Revenue is the money that your business is generating, whereas profit is the money left over after accounting for operating costs. Because your business’s revenue can be reinvested into your business, it’s best to focus on generating revenue before profits.
It’s no secret that most Americans are wary of the country’s economic woes.
While some might chalk up this wariness to stagnant wages, country-wide fears of an economic recession, or a shift in worker consciousness, the truth is a bit more nuanced.
From frustrations with corporate tax rates to skepticism about the fairness of the entire system, our views on the country’s financial policies are constantly evolving. For this reason, we can’t attribute this general unease to one factor alone.
Fortunately, despite this overwhelmingly negative outlook, modern technological advancements have provided entrepreneurs with an easy way to start digital businesses of their own.
Similarly, these advancements allow established business owners to revitalize or refocus their online operations whenever they see fit.
To make the most of this streamlined approach to digital businesses, it’s important to understand the differences between profit vs revenue and, perhaps more importantly, leverage these differences.
Sure:
Most business owners are aware of the general differences between profit vs revenue vs income.
But if you dig a little deeper into the more nuanced aspects of how each measure affects your business, you can determine which are you should focus on to build your business’s long-term success.
From strategizing on profit vs. revenue maximization to identifying your business’s growth stage, there is always more to learn and absorb when it comes to managing your company’s gross income.
In this article, we’ll be taking a closer look at what the definition of net profit and net revenue.
We’ll also compare profit vs. revenue vs. margin and examine a few modern digital solutions.
So:
If you’ve been searching for a profit vs. revenue example and keep coming up short, you’re in the right place. Keep reading for more about net profit, gross income, and modern digital businesses!
- What is net profit?
- What is net revenue?
- Profit vs. revenue: which is more important?
- Modern digital solutions to the profit vs. revenue debate
What is profit?
Before we dig too deeply into profit vs. revenue, let’s take a moment to look at profit on its own.
Profit is the amount of money you have after subtracting the expenses associated with your business operations. Simply put, this is all the money that you have left over.
Profit is the money you’re able to actively pull from. It’s the money above and beyond what your business needs to break even.
Depending on what kind of business you own, your operational costs could be high or nearly nonexistent. Thanks to recent virtual solutions, modern entrepreneurs have countless options they can use to reduce operational expenses to a fraction of their original amount.
Read more: How to Reduce Operating Expenses in Business
Even if you have high revenue, your business could still be losing money if your operational costs outweigh the money you’re bringing in.
For this reason, many business owners focus heavily on profits — largely because profits are generally going to be better for your personal finances (at least in the short term).
That said, focusing exclusively on profit in an attempt to personally enrich founders or other high-ranking business members is an unsurprisingly dangerous way to run your business.
It’s important to note that profit can theoretically be reinvested, but in doing so, it becomes revenue.
There are technically a few different kinds of profit:
- Gross profit
- Net profit
- Operating profit
- Profit before/after tax
Gross profit
Gross profit is simply your business’s profit minus manufacturing costs, the cost of necessary raw materials, or the cost of the products themselves. When you’re calculating your business’s income statement, gross profit is the first analysis you’ll make.
Fortunately, it’s an easy calculation. In a given period, you just need to subtract the cost of goods sold, or COGS, from your business’s total sales.
Your gross profit doesn’t reflect anything outside of the profits of your products or services, so only subtract expenses that are directly related to the production or sale of your products or services.
Let’s run through a quick example:
Say you’ve got a business called Best Business and your total sales for the quarter are $250,000. In the same quarter, you’ve spent $100,000 on the cost of goods sold, so Best Business’s gross profit for the quarter is $150,000.
Net profit
Once you’ve determined your business’s gross profit, you can figure out your net profit with ease.
While the gross profit formula doesn’t account for anything outside of your company’s cost of goods sold, your net profit is a more detailed reflection of your operating expenses.
Essentially, your net profit is the money left over after you’ve accounted for all operating expenses, tax considerations, and any other costs related to the running of your business.
Keep in mind that banks, other financial institutions, and investors will typically use your company’s net profit to help determine how financially healthy your business is.
Now, let’s take a look at how we’d calculate Best Business’s net profit. Thanks to the above example, we now know that Best Business’s gross profit for the quarter is $150,000, so we have our starting point.
Let’s say the company has spent $25,000 on payroll, $25,000 on utilities and rent, $25,000 on marketing, and another $15,000 on quarterly taxes. Next, we combine these figures to determine that Best Business has spent $90,000 on operating expenses this quarter.
Finally, we can subtract Best Business’s operating expenses ($90,000) from its gross profit ($150,000) and we are left with Best Business’s quarterly net profit of $60,000!
Read more: Payroll Loans for Small Business: Why Your Business Credit is Crucial
Operating profit
Operating profit is also known as EBIT or “Earnings Before Interest and Taxes, is a worthwhile metric that is nonetheless often ignored because there usually isn’t much difference between operating profit and net profit – especially in small businesses.
Your business’s operating profit is the company’s gross profits minus its operating expenses, amortization, and depreciation. This means that your company’s EBIT accounts for everything except interest fees and taxes.
For companies that don’t carry large loans, lines of credit, taxes, or anything incurs interest fees, operating profit isn’t a very useful metric. That said, understanding how to calculate this data helps you stay informed when covering the specificities of profit vs revenue.
Profit before/after tax
Technically, your business’s profit before tax will be the same as your operating profit. However, profit before tax also accounts for any interest fees you’re paying.
Similarly, profit after tax is effectively the same thing as net profit. However, other business owners might refer to your net profit as your profit after tax, so it helps to avoid confusion if you’re familiar with both terms.
As you can see, profit might sound simple — but there’s a lot going on behind the scenes.
At the end of the day, you’re running a business because you want to make money. Whether it’s identifying your business’s growth stage or cutting down on operational costs, there are countless ways to add to your business’s income.
Your business should do everything in its power to increase profits – but when you’re focusing on scaling your company, those profits should be reinvested.
Savvy readers might recall that reinvesting those profits turns them into revenue.
What is revenue?
You can’t understand profit vs. revenue if you don’t understand revenue.
Revenue is often called the “top line” because it appears at the top of a profit and loss statement.
So – what is revenue? How is it different from profit?
Revenue refers to the total amount of income generated through business operations. It is a measure of the gross money made by the business through all operations.
While profit refers exclusively to the leftover money in your business, revenue refers to all income that your business manages to secure.
Simply put:
Revenue minus expenses equals profit.
Just like profit, revenue can be broken down into more specific categories:
- Operating revenue
- Non-operating revenue
Operating revenue
Operating revenue is best described as the income your business regularly generates or the sum of the cash inflow from your standard operations.
Essentially, this is the money your business makes doing what it was designed to do.
If you’re running an online retailer, all of the money your business makes selling clothes online is accounted for in your operating revenue.
Non-operating revenue
As you might have guessed, non-operating revenue is the revenue your business generates that isn’t related to its core operations.
Non-operating revenue is the money your business brings in while doing anything outside of what it was designed to do.
This could take the form of an investment, the sale of property or assets, and much more. If you’re running an online retailer but also investing in the stock market through your company, any proceeds from your investments would be considered non-operating revenue.
Your business’s revenue is its lifeblood.
Yes, everyone wants huge profits:
But without a healthy stream of revenue, your business is dead in the water.
The stronger your revenue becomes, and the more you can increase your profit margins, the better off you’ll be.
Which is more important to business owners?
There’s no one-size-fits-all answer to the profit vs. revenue question.
Whether or not you choose to focus on maximizing profits or maximizing revenue is entirely dependent on what you hope to accomplish with your business in the long term.
If a business owner just wants to make a quick buck, they should focus on profits.
Remember, profit implies that the capital will not be reinvested into the business. Ultimately, profits are going to help the business owner’s finances more than the business itself.
For lasting growth, business owners should focus instead on revenue.
Revenue indicates a business’s incoming money on a wider scale.
Revenue can also be reinvested in growing your business further, which can help you make more profit down the road.
Thankfully, you don’t need to pick between profit vs. revenue, sharing with your business the benefits of only one path. Instead, you can focus on different things as you grow, reinvesting revenue when necessary and taking profit when it makes sense.
Keep in mind that a business can have huge revenues that are negated by even larger expenses. Likewise, a business can have outstanding profits but fail to reinvest and grow — leading to stagnation and loss.
As a business owner, you can figure out whether to focus on profit or revenue by keeping a close eye on your business’s finances, operational costs, and expected upcoming expenses.
There is no such thing as too much planning. The more familiar you are with your business, the easier it will be to react to vicissitudes in the market or unforeseen issues in the future.
Read more: Modern Business Solutions: Boost Efficiency, Maintain Flexibility
Below, we’ve put together a quick list of tips for business owners struggling with the profit vs revenue debate:
- More revenue doesn’t always mean more profits
- Pay attention to applicable indicators
- Profitability over revenue growth
- Plan, plan, plan
More revenue doesn’t always mean more profits
On occasion, business owners become too focused on streamlined growth and the ease of scalability, obsessing over growing too much, too quickly.
The idea of bringing in massive revenue and scaling to new heights before making an impressive exit is intoxicating. Unfortunately, the streamlined nature of digital business ownership makes it easy for overeager entrepreneurs to overextend themselves.
Look at companies like WeWork. Despite its astronomical revenue, WeWork lost billions of dollars in 2018 — leading to the destruction of investor confidence, aggressive management changes, and even a class action lawsuit against the company.
Stories like this remind us that growing too quickly and ignoring your business’s infrastructure can spell doom for even the strongest operations.
Pay attention to applicable indicators
Whether it’s analyzing earnings reports, studying marketing data to keep tabs on consumer sentiment, or simply using the market and Federal Reserve updates, modern business owners have several ways to stay informed on how the market is acting.
Collect all the data you possibly can that pertains to your business’s operations.
Gather data on social media engagement to determine the most successful platforms and keep up with how your products are selling and which demographic is purchasing them. The more data you can gather, the easier it becomes to plan for the future.
Additionally, the more data you’ve gathered, the easier it becomes to determine your business’s growth stage.
This standard gives business owners a straightforward model that they can use to help determine potential goals and areas of focus.
Read more: Identify Your Business Growth Stage to Maximize Profits
Planning is still required, but the growth stage model gives business owners short-term and long-term goals with applicable areas of interest for each stage.
Profitability over revenue growth
Strong profitability is more effective than straightforward revenue growth, and this is often as simple as causing each product or service sold to bring in more income. This is because profitability is simply a measure of your business’s profits against its expenses.
Instead of trying to expand your business without worrying about operational costs, focusing on profitability helps you to make the most of the revenue you’re already bringing in. In other words, focusing on profitability allows you to reduce operational costs and improve your business’s infrastructure.
Let’s look at this 2-quarter Best Business example below to clear things up:
Best Business has had a tough quarter.
It’s still bringing in $250,000 in sales, but operating expenses have risen to an astonishing $300,000 – meaning the company is losing $50,000 that quarter.
If Best Business were to double its sales and its operating expenses, it’d still be losing money.
So, instead of focusing on revenue, Best Business needs to focus on profitability.
The following quarter, Best Business buckled down.
It brought in another $250,000 in sales, but after transitioning to a Virtual Office, consolidating part-time positions, automating receptionist work, and strengthening its relationships with its suppliers, Best Business only spent $100,000 on operating expenses.
Now:
Best Business’s revenue hasn’t increased at all, but the company made $150,000 more than it did the previous quarter. Thanks to these infrastructure and personnel changes, Best Business can continue keeping more of the future revenue it brings in.
Plan, plan, plan
Barring an obsessive nature that prevents you from getting virtually anything else done, there is no such thing as too much planning.
The better prepared you are for the future, the better positioned your business will be.
Modern digital solutions to the profit vs. revenue debate
Revenue and profit are both important elements of your business’s finances.
You should aim to reinvest a sizable amount of your revenue into growing your business further. This will keep your business stable while ultimately helping you make more profit in the long term.
That said, your business doesn’t always need to focus on one thing – whether that’s increasing revenue or increasing profits.
By focusing on profitability, cutting operational costs, and improving your business’s infrastructure, you can get the most out of the money you’re already making.
Further reading
- Identify Your Business Growth Stage to Maximize Profits
- Payroll Loans for Small Business: Why Your Business Credit is Crucial
- Modern Business Solutions: Boost Efficiency, Maintain Flexibility
- How to Reduce Operating Expenses in Business
Alliance Virtual Offices provides several solutions for established entrepreneurs, fledgling business owners, and everyone in between.
The profit vs. revenue dilemma can lead to frustration and confusion about how you should be approaching your business’s finances.
Thankfully, Alliance’s digital solutions can help your business reduce operational and your full-time hiring requirements by a considerable margin while boosting your team’s privacy.
Our Virtual Offices are the perfect alternative to traditional office space.
Historically, business owners were forced to enter 3 to 5-year leases for commercial space — including first and last months’ rent, utilities, and other leasing fees. With one of Alliance’s Virtual Offices, business owners can get an easy-to-manage 6-month plan for a fraction of the cost.
In addition to being cost-efficient and flexible, our Virtual Offices come with access to a physical workspace. This means that if you just want to avoid the monotony of your day-to-day routine, you have an easily reservable workspace that’s ready for you!
With our Live Receptionist, you don’t have to worry about multi-tasking every time the phone rings. You also don’t have to worry about hiring a full-time receptionist.
Instead, use one of our friendly and professional receptionists to strengthen customer relations and give yourself some time away from the phone.
Virtual Phone Numbers represent another great tool that allows business owners to effortlessly connect with team members, keep personal information private, and provide unlimited connections while you quickly scale to accommodate new team members.
As you can see, the profit vs. revenue question isn’t as simple as it seems, and your solution depends largely on your unique business goals.
For more information on tools that will improve your net profit and gross income, check out Alliance’s Virtual Office Blog or contact us today!
