As a small business owner, understanding your financials is crucial to your success. Two key terms that often get mixed up are ‘revenue’ and ‘profit.’ Let’s dive into the differences between these two financial terms.
Revenue, often referred to as the ‘top line,’ is the total amount of money your business brings in from its activities, primarily from sales of products and services. It’s the first figure you see on your income statement and gives you a snapshot of your business’s earning potential.
For instance, if you have a community and sell 100 memberships at $50 each, your revenue is $5,000. This figure doesn’t take into account any costs or expenses. It’s simply the total income generated from your primary business activities.
On the flip side, profit, often called the ‘bottom line,’ is what remains after all business expenses have been deducted from the revenue. These expenses can include cost of goods sold (COGS), operational costs, taxes, and more.
Continuing with our community example, let’s say the cost to host this community requires additional expenses like software costs and the salaries of your member success team amounting to $3,000. So, your profit would be $2,000 ($5,000 revenue – $3,000 expenses).
There are two types of profit – gross profit and net profit. Gross profit is your revenue minus the cost of goods sold. In our example, the gross profit would be $2,000 ($5,000 revenue – $3,000 COGS). Net profit is what’s left after all expenses, including taxes and operational costs like marketing, are deducted from the revenue.
Understanding the difference between revenue and profit is essential for small business owners. Revenue gives you an idea of your business’s overall earning potential, while profit shows you how much your business earned after all expenses.
A business can have high revenue but low profit if the costs to run the business are high. Conversely, a business can have lower revenue but higher profit if it manages to keep its costs low.
As a fractional CFO, I can’t stress enough the importance of understanding these financial terms. They are key indicators of your business’s financial health and can guide you in making informed decisions.
While revenue is important, it’s not an indicator of business success. Profit, on the other hand, shows your business’s ability to generate surplus money that can be reinvested for growth or distributed among stakeholders.
Understanding the difference between revenue and profit is not just about knowing financial jargon. It’s about gaining insights into your business’s financial health and making strategic decisions that drive growth and sustainability.
Now, you’re equipped with the knowledge to understand your financials better and make informed decisions.
