Revenue vs Profit: What’s the Difference and Why Does It Matter?

Every business needs to know how much money it’s bringing in, but if you’ve ever told someone how much your business makes, you’ve probably heard this question: Is that revenue or profit?

Some people will say gross revenue, but the meaning is essentially the same. High revenues are always impressive, but if your expenses are also high, your business could be in danger. That’s why most loan officers and venture capitalists want to know your revenue and your profit. So, let’s talk about what that means.

What Is Revenue?

Revenue is the total amount of money your business made in a given time period, whether it’s a month, a quarter, or a year. To make it super simple, let’s say you had three clients last month and they each paid $500. Your revenue for that month is $1,500.

What Is Profit?

The saying ” You have to spend money to make money” is often misused, but there is some truth to it. Every business has expenses – from equipment and software to hiring staff. Your revenue – your expenses = your profit.

For example, let’s say you had $1,000 worth of business expenses last month. If your revenue was $1,500, then your profit for the month was $500.

Pay Yourself First

A lot of small business owners make the mistake of not paying themselves a salary. They pay all their other expenses, wait to see how much profit they made, and then they take that as their salary.

Instead, you should treat your salary as equally important as the salaries of the rest of your staff. Your salary needs to be included as part of your business expenses. Only then can you truly calculate your profit.

Why You Need to Understand the Difference Between Revenue and Profit

There’s no denying that your business’ revenue is important, but you need to know your profit to truly understand the financial state of your business. A company that has millions of dollars in revenue is impressive, but if it’s also spending millions of dollars, it could still be in a financially vulnerable position.

Understanding How Revenue and Profit Change Over Time

One of the biggest benefits of checking in with your business’ finances on a regular basis is to track how it changes over time. Most businesses experience peaks and valleys: times when they have a lot of revenue coming in, followed by times of low revenue.

Sometimes business expenses can be the same way. While a lot of business expenses tend to remain constant, such as software subscriptions, rent or mortgage on your office space, etc., sometimes you can spend more in some months than others. For example, if an advertising opportunity arises, or you decide to launch a new marketing campaign, you’ll probably end up spending more on your business in that month than in other months.

By tracking your revenue and profits, you’ll be able to get a better sense of when it’s a good time to make those bigger investments, and when you should probably pull back on your business spending. Helping small business owners make those decisions is part of my job as a fractional CFO. Whether you just need someone to keep track of your books, or you need someone to analyze your numbers and help you make better business decisions, you need a Bookkeeping Doctor. Register for your FREE consultation now so we can discuss options for helping you grow your business faster.