Profit vs Revenue: The two numbers that tell your business’s true story

What is revenue?

Revenue is the total amount of money a company brings in from its primary business activities before any expenses are taken out. It's the purest measure of a company's ability to sell its products or services and is often referred to as the "top line" because it sits at the very top of a company's income statement. For a retail store, revenue is the cash collected from selling merchandise. For a software company, it might be the income from monthly subscriptions.

Essentially, revenue is the gross income figure. It's a key indicator of a company's sales performance and market demand. Strong and growing revenue suggests that the company's offerings are resonating with customers and that its sales and marketing strategies are effective. However, revenue alone does not tell the whole story. It doesn't account for the costs associated with generating that income, which is why it's only the first piece of the financial puzzle ^3,4.

Factors impacting revenue

A company's revenue is not a static number; it is influenced by a multitude of internal and external factors. Understanding these drivers is crucial for strategic planning ^1,5,6.

• Pricing Strategy: The price set for a product or service directly impacts revenue. Higher prices can increase revenue per unit, but may decrease the total number of units sold. Finding the optimal price point is key.
• Sales and Marketing Efforts: Effective marketing campaigns and a skilled sales team can significantly boost brand awareness and drive sales volume, thereby increasing revenue.
• Market Demand: The overall consumer demand for a company's products or services is a primary driver. This can be affected by consumer trends, needs, and preferences.
• Competition: The presence and actions of competitors can force price adjustments or affect market share, directly influencing a company's revenue potential.
• Economic Conditions: Broader economic factors like inflation, recessions, or economic booms affect consumer spending power and business investment, which in turn impacts sales.
• Product/Service Quality: High-quality offerings lead to better customer satisfaction and retention, creating a stable and often growing revenue stream.

Types of revenue

Revenue can be categorised based on its source, which helps in analysing the stability and nature of a company's income 7.

Annual recurring revenue

Annual Recurring Revenue (ARR) is a critical metric for subscription-based businesses, such as Software-as-a-Service (SaaS) companies. It represents the total value of subscribed revenue that a company expects to receive from its customers on an annual basis.

ARR provides a predictable and stable view of a company's future income, making it a favourite metric for investors evaluating growth and stability. It's typically calculated by multiplying the number of subscribers by the average annual revenue per customer. Its monthly equivalent is Monthly Recurring Revenue (MRR).

Operating revenue

Operating revenue is the income generated from a company's core, day-to-day business operations. This is the most important type of revenue as it reflects the company's ability to succeed at its primary purpose. For example, for a car manufacturer, operating revenue comes from selling cars. For a law firm, it comes from providing legal services. This figure demonstrates the health of the main business ⁹.

Non-operating revenue

Non-operating revenue is income generated from activities outside of a company's primary business operations. This income is often a one-time event or is incidental to the main business. Examples include ^10,11:

• Interest earned on cash in the bank.
• Revenue from the sale of an old asset, like a building or equipment.
• Income from a lawsuit settlement.

While it contributes to the company's overall income, it is analysed separately because it doesn't reflect the performance of the core business.

What is profit?

Profit is the financial gain a business realises after all expenses, costs, and taxes associated with generating revenue have been subtracted from the total revenue. It's the ultimate measure of a company's financial success and efficiency, and is famously known as the "bottom line" because it's one of the last lines on the income statement ².

If a company has high revenue but even higher expenses, it will not have a profit; it will have a loss. Therefore, profit provides a more complete picture of a company's financial health than revenue alone. It indicates how well a company manages its costs, from production to marketing to administrative overhead. A consistently profitable company is sustainable, can reinvest in its growth, and can provide returns to its shareholders.

Factors impacting profit

Profit is a function of both revenue and expenses. Therefore, any factor that affects revenue or costs will ultimately impact profit ¹⁴.

• Cost of Goods Sold (COGS): This includes the direct costs of producing goods or services, such as raw materials and direct labour. Lowering COGS directly increases profit.
• Operating Expenses (OPEX): These are the indirect costs required to run the business, such as rent, salaries for administrative staff, utilities, and marketing expenses. Efficient management of OPEX is crucial for profitability.
• Pricing Strategy: Price not only affects revenue but also profit margins. A price that is too low may generate sales but leave little room for profit.
• Operational Efficiency: Streamlining processes, reducing waste, and improving productivity can significantly lower costs and boost profit.
• Financing Costs and Taxes: Interest paid on debt and corporate taxes are significant expenses that are deducted before arriving at the final net profit.

Types of profits

Profit is not a single number. It is calculated at different stages on the income statement to provide different insights into a company's performance.

Gross profit

Gross profit is the first level of profitability. It is calculated by subtracting the Cost of Goods Sold (COGS) from total revenue ¹⁵.

• Formula: GrossProfit = Revenue − COGS

Gross profit reveals how efficiently a company uses its labour and materials in the production process. A high gross profit indicates that the company is doing a great job of converting raw materials into products at a low cost. The Gross Profit Margin ((GrossProfit / Revenue)×100%) is an excellent metric for comparing a company's production efficiency against its competitors.

Net profit

Net profit is the "bottom line" profit mentioned earlier. It is the money left over after all of the company's expenses have been paid, including COGS, operating expenses, interest on debt, and taxes 2,16.

• Formula: NetProfit=Revenue−(COGS+OperatingExpenses+Interest+Taxes)

Net profit is the most comprehensive measure of profitability. It shows the company's overall financial success for a given period. A positive net profit (also called net income or net earnings) means the company is profitable, while a negative number indicates a net loss. The Net Profit Margin (( NetProfit / Revenue)×100%) shows what percentage of revenue is left as pure profit.

Operating profit

Operating profit, also known as Earnings Before Interest and Taxes (EBIT), measures the profit a company generates from its core business operations, without considering the effects of interest and taxes. It is calculated by subtracting operating expenses from the gross profit ^14,17.

• Formula: OperatingProfit=GrossProfit−OperatingExpenses

Operating profit provides a clear view of how well the company's main business is performing. By excluding interest and taxes, it allows for a more direct comparison of the operational efficiency of different companies, regardless of their debt structures or tax jurisdictions.

Key differences between profit vs revenue

While interconnected, revenue and profit differ in almost every fundamental way, from their conceptual meaning to their role in business strategy.

Concept

The most fundamental difference is conceptual. Revenue is the total income generated, representing the scale and sales activity of a business. It's a measure of market penetration and demand. Profit, on the other hand, is a measure of efficiency and financial health. It represents the net earnings after all costs of doing business have been accounted for. A business can have massive revenue but be unprofitable, which is an unsustainable model ^1,2.

• Revenue: The total money earned. The "top line."
• Profit: The money left after paying all expenses. The "bottom line."

Position on financial statements

On a company's income statement (also known as a Profit and Loss or P&L statement), revenue and profit appear at different places, which is why they're called the "top line" and "bottom line." ¹⁸

• Revenue: It is the very first line item listed on the income statement.
• Profit: Different types of profit appear sequentially down the statement. Gross profit appears after COGS is deducted. Operating profit appears after operating expenses are deducted. Net profit is one of the final lines, after all other expenses like interest and taxes are subtracted.

Formula and calculation

The formulas used to calculate revenue and the various types of profit are distinct and highlight their different natures ^2,3,15,17.

• Revenue Calculation: The simplest formula for a product-based business is:
  
  • Revenue = Sales Price per Unit × Number of Units Sold

• Profit Calculation: Profit is always calculated by subtracting expenses from an income figure.
  
  • Gross Profit: Revenue − COGS
  • Operating Profit: Gross Profit− Operating Expenses
  • Net Profit: Operating Profit − Interest − Taxes

Role in decision-making

Both metrics are vital for making informed business decisions, but they guide different types of strategies ^1,19.

• Revenue's Role: High or growing revenue figures can inform decisions related to market expansion, scaling production, and increasing marketing spend. It helps gauge the effectiveness of sales strategies and product-market fit.
• Profit's Role: Profit figures guide decisions about cost control, pricing adjustments, operational efficiency, and resource allocation. A low profit margin might trigger a review of supply chains or a reduction in overhead costs. Profitability is the ultimate indicator of a business model's viability and is critical for securing investment and ensuring long-term survival.

Profit vs Revenue: Which should you focus on most?

The question of whether to prioritise revenue growth or profitability is a classic business dilemma, and the answer often depends on the company's stage of development and strategic goals.

When should you focus on revenue?

For early-stage startups and companies in a high-growth phase, the primary focus is often on revenue. The goal is to rapidly acquire market share, establish a strong brand presence, and build a large customer base.

In this phase, companies might operate at a loss, intentionally sacrificing short-term profit by investing heavily in product development, marketing, and sales. Investors in these companies are often more interested in the growth rate of revenue and user acquisition as indicators of future potential. The belief is that once market dominance is achieved, the focus can shift to monetisation and profitability.

One key example of this is Shopify. In 2022, the company reported USD 5.60 billion in revenue, up about 21% from 2021. However, it also recorded a net loss of approximately USD 3.46 billion. This was driven by higher operating expenses, increased investment in its fulfilment network, expanded headcount, and other costs (e.g. compensation and product development), as well as losses from equity investment values ²¹.

However, when discussing revenue and profit, it’s also important to recognise that investors don’t just look at these metrics in isolation. For high-growth companies, particularly in the SaaS sector, one widely used benchmark is the Rule of 40 ²².

The rule basically states that a company’s revenue growth rate (%) + profit margin (%) should be at least 40% to assess whether it has successfully balanced its growth and profitability.

• If a company is growing quickly (say, 50% per year), investors may accept lower or even negative profit margins.
• If a company is growing slowly (say, 10% per year), it's expected to have strong profit margins (at least 30%).

This metric explains that a company can be "healthy" and create sustainable value continuously, even with a negative profit margin.

When should you focus on profit?

For mature, established businesses, the focus typically shifts towards profitability. These companies have already captured a significant market share and now need to demonstrate efficiency and sustainability. The goal is to optimise operations, manage costs effectively, and generate consistent profits to provide a return to shareholders and fund future initiatives. For these businesses, revenue growth is still important, but it must be profitable growth. Increasing revenue at the expense of profit margins is generally seen as a poor strategy.

Ultimately, the most successful businesses find a balanced approach. You can't survive indefinitely without profit, no matter how impressive its revenue figures are. Conversely, focusing solely on maximising profit by cutting costs too aggressively may stifle innovation and lose market share to more growth-oriented competitors.

Therefore, the ideal strategy is to pursue "profitable growth"—finding ways to increase revenue while simultaneously controlling costs and improving efficiency, ensuring that the top line growth translates into a healthy bottom line ^1,20.

Maximise your profit and revenue with Aspire

Navigating the complexities of revenue and profit requires more than just understanding the concepts; it requires powerful tools to manage your finances effectively. This is where a comprehensive financial operating system like Aspire can be a game-changer for your business.

To grow revenue, you need seamless control over your income streams. Aspire's Business Account helps you streamline your accounts receivable with powerful invoicing tools, ensuring you get paid faster. By having a clear, real-time view of all incoming funds in one place, you can better track your sales performance and make data-driven decisions to boost your top line.

However, as we've established, revenue is only half the battle. Maximising profit requires disciplined expense management. Aspire's smart Corporate Cards and Expense Management software give you complete visibility and control over your company's spending. You can set budgets, track expenses in real-time, and eliminate wasteful spending that eats into your bottom line. By automating these financial workflows, you not only reduce costs but also free up valuable time to focus on strategic initiatives that drive profitability.

In conclusion, understanding the essential differences between revenue and profit is crucial for evaluating a company’s financial health and steering it toward success. Revenue reflects your market traction and sales prowess, while profit demonstrates your operational efficiency and long-term viability. By leveraging both metrics to inform your strategy and using integrated financial tools like Aspire to manage them, you can build a resilient, efficient, and ultimately more successful business.