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Revenue is the amount of money that a company receives for selling its goods and services.  Profit is the amount of money that a company earns after it has paid all its expenses.

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Quick reference

Revenues and Profits

Revenue is the amount of money that a company receives for selling its goods and services.  Profit is the amount of money that a company earns after it has paid all its expenses.

When to Use Revenues and Profits

Revenue and profit are related in that profit is calculated by subtracting business expenses from business revenue.  Both are used in financial reporting.  Normally if you need one, you need the other also.

Instructions

  • Both revenue and profit are calculated over some time period such as a week, month, quarter, or year.
  • Revenues include money received from customers for both goods and services.
  • When cash basis accounting is used, the date for revenue is when the customer pays.
  • When accrual basis accounting is used, the date for revenue is when the product is shipped or the service provided.
  • The value of profit for a time period is determined by subtracting the expenses incurred during that time period from the revenues earned during that time period.
  • Profit can be either positive or negative depending upon whether the revenue was larger or smaller than the expenses.

Hints and Tips

  • Many people confuse revenue with profit.  They think that because a company received a large amount of money from its customers it is profitable.  However, the expenses, or costs, of the business may be even larger than the revenue leading to an unprofitable business.
  • When using the accrual basis, a company can have high levels of revenue and profit, yet still run out of money if the customers are very slow paying.
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  • 00:04 Hi, this is Ray Sheen.
  • 00:06 Let's talk about two of the fundamental elements of business
  • 00:09 financial planning and analysis.
  • 00:11 That is revenue and profit.
  • 00:14 First I will talk about revenue.
  • 00:17 Revenue is the money that comes into a business as part of the normal
  • 00:20 business operations.
  • 00:22 The company sells products and services.
  • 00:24 Revenue is the money received from customers for those products and services.
  • 00:29 We have mentioned that every transaction has both an amount and
  • 00:31 timing associated with it.
  • 00:33 Well, the amount is usually pretty clear when it comes to revenue.
  • 00:37 It is the sales price less any discounts or coupons.
  • 00:40 However the timing of revenue will depend upon which accounting method is used.
  • 00:45 In a business that uses the cash accounting method,
  • 00:47 revenue occurs whenever the customer gives you money.
  • 00:50 There is an actual exchange of cash, and
  • 00:53 you put money in the company's cash register, or as is more typically happens
  • 00:57 in today's economy, you transfer funds from their account to your account.
  • 01:02 For business that uses the accrual accounting method,
  • 01:05 Revenue occurs when you deliver the product or service to the customer.
  • 01:08 The customer may be handed an invoice that they don't pay for a week, a month, or
  • 01:13 maybe even longer.
  • 01:14 However in this case, the company still shows the value of the product or
  • 01:17 service as revenue with the transaction date of when it was delivered.
  • 01:22 Naturally, this could be a problem if you have trouble collecting on the bills.
  • 01:26 However, as we mentioned in a different module, this method is better for
  • 01:29 aligning costs and benefits in the same time period and
  • 01:32 gives a truer picture of the business operational efficiency.
  • 01:36 Now let's look at profit.
  • 01:39 Profit is the money the business has earned.
  • 01:41 By that I mean it is the difference between what the product or
  • 01:43 service is sold for, and what it costs to deliver the product or service.
  • 01:48 A business must earn profit if it is going to survive.
  • 01:52 At a high level, calculating profit is very straight forward.
  • 01:55 Add up all the revenue in the business and then subtract all the costs.
  • 01:59 What is left is the profit or loss.
  • 02:02 Profit is normally calculated for a time period such as a month or a year.
  • 02:06 So all the revenue from a time period is added and all the costs are subtracted
  • 02:10 to determine if the company made any money during that time period.
  • 02:14 Hopefully there was more revenue than cost, giving a profit.
  • 02:18 But often there will be time periods when there is more cost than revenue,
  • 02:21 and instead of a profit, the company experienced a loss.
  • 02:25 Something you may have personally experienced when there was too much month
  • 02:28 left at the end of the money.
  • 02:31 So now let's look at the difference between revenue and profit.
  • 02:34 As you can tell from what we have just been discussing, revenue and
  • 02:37 profit are different, but related.
  • 02:39 Revenue is the money that comes into a business from selling goods and
  • 02:42 selling services, and
  • 02:44 profit is the money that accumulates in the business after paying the bills.
  • 02:48 The relationship is shown in the formula Profit = Revenue- Costs.
  • 02:53 If a company wants to increase its profit, it must increase revenue
  • 02:57 without driving up costs or decrease costs without reducing revenue.
  • 03:02 Both revenue and
  • 03:02 profit are usually reported over some time period such as a month, quarter or year.
  • 03:07 That is why you will sometimes hear a business person say,
  • 03:10 we had a good month, or we had a bad month.
  • 03:13 That means that either profits or
  • 03:14 revenues were higher or lower than expected for that month.
  • 03:18 Of course, the timing of transaction becomes very important
  • 03:21 when we start analyzing each month for revenue and profit.
  • 03:23 A one-day delay that moves a sale or
  • 03:26 cost from one month to another can impact the profits.
  • 03:30 In a business with very low overhead or product costs, revenue and
  • 03:34 profit can be similar.
  • 03:35 Small, personal services businesses such a personal trainer or
  • 03:39 independent consultant are often in this category.
  • 03:42 So let's summarize.
  • 03:44 Revenue and profit are two fundamental elements of financial reporting.
  • 03:50 Revenue is the money that comes in, and profit is the money that stays in.

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