By: Rachel Himmelspach
When working in your books, you need to know exactly what the numbers mean. Often times people know the general meaning of a term like, “profit” but don’t actually know how it’s different from “revenue” or how the two affect each other.
Your profit is how much money your business has made from the sales of your goods and services or from things like fees or interest during a specific time period. For example, you could look at your profit from April to see how much money you made during those 30 days. If you sent out invoices for a total of $35,000 from April 1 – 30, then your profit for the month is $35,000.
On the other hand, when you look at your revenue, you need to know that it does not refer to a specific time frame. Revenue consists of ONLY how much money your business has earned. It does NOT include any expenses or costs. It’s common to look at your revenue with a specific product, service, or customer. This is also called income.
So, you’re probably thinking, “wait, what? What’s the difference?!” While revenue is only the money made, profit is the result of your revenue (money made) minus your expenses.
Revenue – Expenses = Profit
To run a successful business, you want profit. If you’re only looking at profit, you aren’t looking at the whole picture, you’re only look at a part of it. Using this equation, if your revenue is $45,000 and expenses are $25,000, then have a profit of $20,000.
Although it’s important to make a profit, it’s best not to lean on any one metric – the success of your business lies within more than just profit. If either your profit or revenue out of sorts, your business will suffer. Having a positive profit is always great, but bringing in fresh revenue regularly is also necessary for a successful business.
Now that you know the difference between profit and revenue, take a look at your books with a new eye.