Revenue vs Profit
Revenue is not the same thing as profit. Profit measures what is left over after all costs are paid, while revenue measures the total amount of money brought in before any expenses are taken out.
Why Does Revenue Matter to a Company?
Revenue matters to a company because it can be used as an indicator of the health of the business. It is also significant in determining the value of a business for purposes of being acquired or being sold to other owners.
Through revenue, the investors get an idea of how much money the business can earn in the future. It also can help companies create growth plans.
Businesses can pay their employees, make profits, and expand more quickly when they have increased their revenue.
How Are Revenues Calculated?
Revenues are calculated by adding up all of the money that a company received over a period, which is sales less returns and allowances. If a company makes a sale, that is counted as revenue.
There are two main ways that companies calculate revenues:
- All at one time – This method includes all of the cash that was received in a specific period. However, this method isn’t used very often and it usually does not provide an accurate picture of the company’s performance over time.
- Periodic – This is the more common way that companies calculate revenue and it looks at cash received during a specific time frame (e.g., month, week, day).
What Are the Different Types of Revenues? How Do They Differ From One Another?
The different types of revenues are Operating Revenue and Non-Operating Revenue.
This is revenue that comes from sources separate from the main operations of the business. This includes investment income (such as dividends from stocks or interest from bonds) and real estate revenue.
Accrued vs Deferred Revenue
The difference between accrued revenue and deferred revenue is that accrued revenue is already earned, which means that it has been recorded in the books and then the cash was received.
For example, if a business receives a payment from a customer on account, then that amount will be included under accrued revenue.
Deferred revenues are not earned until later when a company delivers a good or service to a customer.
For example, if a company sells an annual subscription, the revenue will be deferred until all of the services are provided.
There are different rules regarding how these two things are handled for tax purposes, but it is also important to know that accrued revenue has more value than deferred revenue because it affects your balance sheet.
Common Misconceptions About Revenue and Its Impact on Businesses
Revenue Matters More Than Profit
This is not necessarily true because profit reflects the actual performance of a company and can be used to measure each stage of production, as well as the return on every dollar invested into the business.
It Does Not Matter if More Money Comes In, but It Only Matters if the Company Is Making a Profit
While this may be true, it does not measure how much money was made and whether or not there are still operating costs that need to come into play before the number of shares outstanding and/or debt can be reduced.
Revenue Should Reflect All Sales
Another misconception about revenue is that it should reflect all sales, even those sales which will not be collected in full. This may lead to a decrease in cash, which can affect the operations of a company and slow down its growth.
The Bottom Line
Revenue is one way we measure how well a business is doing. While revenue does not reflect all aspects of a company, it does help us determine if the business is making a profit or not.
Revenue also helps companies grow and attract investors.
Several types of revenues differ from one another. Each type of revenue measures something different or excludes certain costs before money can be made from selling the good or service.
This makes it one of the more important measures of success for businesses, large and small alike.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.