Every business makes a basic calculation for every decision in which it balances projected revenue versus projected expenses. This is so fundamental a part of the business process that it often goes unremarked. However, this does not change the importance of this calculation. Understanding the relation between revenues and expenses will take you a long way toward understanding how business works.
A business's revenues can be defined as the amount of money that at any time it is bringing in through sales or any other ventures. A company's revenues will fluctuate greatly throughout any period of time depending on the demand for its product. For this reason, it is wise to select a specific increment of time in which to measure revenues. Companies often prepare annual revenue reports that measure their total revenues for a year.
A company's expenses can be defined as any cost that it might incur, such as for infrastructure or payroll. Expenses also will often fluctuate during any period of time but are more under the direct control of a company. It is possible to reduce expenses by making cuts in one or more areas. Most businesses attempt to correlate their expenses with revenues so that expenses stay within range and do not exceed revenues.
Any business faces a choice of how much risk to take when it comes to its revenues versus its expenses. By spending more as a business you will stand to gain more in revenue if you are successful. If you aren't successful, however, your expenses will potentially exceed your revenues and leave you in debt. There is a standard rule in business that the more risk you take the more you will stand to gain.
It is not at all unusual for a business's expenses to exceed its revenues. The majority of new businesses spend their first several years in debt. Revenues take time to build, where as expenses are immediate. There are many ways that businesses cope with this situation. Many take out loans of various sorts from financial institutions. Others receive funding to keep them afloat from investors, such as venture capitalists or family members.
- The New York Times: Microsoft Profits Are Hurt by Big Expenses
- The Motley Fool: How to Read a Balance Sheet - Current Assets
- The Motley Fool: The Cost of Doing Business
- CNN Money: How to Lose Money Fast - Open a Business
- USA Today: Google's Rapidly Rising Expenses Crimp Earnings
- USA Today: How to Keep the Revenue Coming
- TongRo Images/TongRo Images/Getty Images