Revenue and profit have distinctly different meanings. Revenue is the money a business earns from the sale of its goods and services to customers. Profit is the money that remains after subtracting all the expenses required to run the business. Both figures are important when analyzing your financial statements, according to Harvard Business School.
To illustrate the difference between revenue and profit, let’s use the example of Fred’s Auto Repair.
How to Calculate Revenue
For the past year, Fred’s shop had sales for the following services:
- 200 brake replacements X $400 = $80,000
- 300 engine tune-ups X $250 = $75,000
- 275 tire replacements X $600 = $165,000
- 350 mechanical repairs X $400 = $140,000
These sales result in total small business revenue of $460,000.
How to Calculate Profit
Fred’s total expenses for the year for materials, mechanics’ labor, rent, utilities, insurance, taxes and accounting fees add up to $391,000. Profit is found by subtracting expenses from total revenues.
Profit = $460,000 – $391,000 = $69,000
It’s important to understand the difference between revenue and profit. Although they are closely related, they tell very different stories about the health of your business.
From the example of Fred’s Auto Repair, you can see that profits could be improved by either increasing revenues or reducing expenses. Tracking your monthly revenue will show whether your business is growing or not. It will also tell you if your marketing efforts are paying off, or if you should be promoting other services and offering discounts.
Without revenue, profits wouldn’t exist. If you only have expenses and no sales, the business will have a loss. You have to pay attention to both indicators to know where to focus your efforts.