guideRevenue vs Profit
Understanding the difference between revenue and profit is essential for any business leader, particularly for those involved in financial planning and analysis (FP&A). The goal is to provide FP&A professionals, CFOs, finance leaders, and C-suite decision-makers with a clear, concise guide to using revenue and profit as part of their broader financial analysis.
What Is Revenue?
Revenue represents a company’s total income through its business activities over a given period. For most businesses, revenue comes from sales of goods or services. However, companies may also generate non-sales revenue, which includes income from investments, interest, rentals, or other sources. Revenue appears at the top of the income statement, making it the first figure considered when evaluating a company’s financial performance.
Non-Sales Revenue
Non-sales revenue plays a vital role for companies with diversified income streams. Businesses that invest heavily in real estate, financial instruments, or other sectors may have significant non-sales revenue, including:
- Interest income: Generated from investments or savings accounts
- Rental income: From leasing property or equipment
- Dividend income: From shares in other companies
Recognizing these sources of revenue is crucial when building accurate financial models and forecasts. For FP&A teams, identifying all revenue streams ensures they capture a complete picture of the company’s earning potential over time.
What Is Profit?
Profit represents the amount left after deducting all expenses from revenue. It’s one of the most important indicators of a company’s financial health. For FP&A professionals and CFOs, understanding profit provides insight into operational efficiency and cost management. Unlike revenue, profit accounts for the expenses associated with running the business, making it a more comprehensive metric.
There are multiple types of profit, each providing different levels of detail about the company’s earnings:
- Gross Profit: Revenue minus the cost of goods sold (COGS)
- Operating Profit: Gross profit minus operating expenses
- Net Profit: Revenue minus all expenses, including taxes and interest
Profit is often called the “bottom line” because it reflects the final earnings a company can use for reinvestment, debt repayment, or distribution to shareholders.
Revenue vs Profit: Key Differences
The distinction between revenue and profit is critical for accurate financial analysis. Revenue reflects a company’s total income before expenses, while profit represents what’s left after all costs are deducted. Here’s why that distinction matters:
- Revenue measures total earnings, while profit shows how well a company manages costs.
- Revenue highlights the company’s ability to generate income, while profit reflects its capacity to turn that income into sustainable growth.
- High revenue doesn’t always translate to high profit. For FP&A professionals, understanding how costs impact profitability is essential when creating budgets or running forecasts.
How Is Revenue Calculated?
Revenue is calculated using various metrics, depending on the industry and revenue streams. For SaaS and other subscription-based businesses, revenue measurement might focus on recurring customer income. For other businesses, it may be centered around product sales. Here’s a breakdown of common revenue calculations:
Net Revenue
Net revenue represents total sales minus discounts, returns, and allowances. For example, if a company has gross sales of $500,000 but provides $20,000 in discounts and has $10,000 in product returns, the net revenue would be:
Net Revenue = 500,000−(20,000+10,000) = 470,000
Average Revenue Per Unit/User/Account
Average Revenue Per Unit or User (ARPU) tracks the average revenue generated per customer, account, or unit sold. For subscription-based businesses, it’s an effective way to measure the profitability of each customer. For instance, if a software company generates $200,000 from 1,000 users, the ARPU would be:
ARPU = 200,000 / 1,000 = 200 per user
Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR)
Monthly recurring revenue (MRR) and annual recurring revenue (ARR) are essential metrics for SaaS businesses. MRR helps track month-to-month income from subscriptions, while ARR provides a broader view by annualizing recurring revenue streams. These metrics allow companies to forecast revenues and evaluate long-term financial sustainability, helping FP&A teams adjust strategies to meet changing prices and market conditions.
How Is Profit Calculated?
Profit is calculated by subtracting expenses from total revenue. FP&A teams use various profit metrics to measure financial health at different levels.
What Are the Different Types of Profit?
In addition to gross, operating, and net profit, other metrics provide deeper insights into profitability, especially for decision-makers focused on operational efficiency and cash flow.
Earnings Before Interest, Taxes, Depreciation, and Amortization: EBITDA strips away non-operating expenses to provide a clearer view of a company’s core operational profitability. It’s a popular metric for evaluating businesses in capital-intensive industries, as it eliminates the impact of capital structure and tax strategy from profit calculations.
EBITDA = Revenue−COGS−Operating Expenses
Free Cash Flow: FCF measures the cash the business generates after accounting for capital expenditures. It’s a critical metric for assessing how much cash is available for reinvestment or debt repayment. FP&A teams often use FCF to understand the company’s liquidity and financial flexibility.
Free Cash Flow = Operating Cash Flow−Capital Expenditures
Gross Profit
Gross profit provides insight into the efficiency of producing goods or services. It’s calculated by subtracting the cost of goods sold from total revenue. For example, if a company generates $300,000 in revenue but incurs $120,000 in COGS, the gross profit is:
Gross Profit = 300,000−120,000 = 180,000
Operating Profit
Operating profit considers the costs associated with running the business, excluding interest and taxes. If a company’s gross profit is $180,000 and it spends $70,000 on operating expenses, the operating profit would be:
Operating Profit = 180,000−70,000 = 110,000
Net Profit
Net profit represents the total earnings after all expenses, including interest and taxes, are deducted. If the operating profit is $110,000 and the company incurs $40,000 in taxes and interest, the net profit would be:
Net Profit = 110,000−40,000 = 70,000
For FP&A professionals and financial decision-makers, understanding the difference between revenue and profit is essential for creating accurate budgets, forecasts, and financial analyses. While revenue reflects the company’s ability to generate income, profit reveals how effectively that income is managed to cover costs and drive growth.
Firmbase’s FP&A platform helps companies automate the processes of tracking both revenue and profit, providing real-time insights into financial health and allowing teams to identify areas for improvement quickly. By keeping data in sync and streamlining forecast creation, Firmbase ensures that companies can make informed decisions based on accurate financial data. Learn more by booking a demo.
Frequently asked questions.
No, profit cannot exceed revenue. Profit is calculated by subtracting costs from revenue, so it will always be equal to or less than revenue.
No, revenue includes sales but may also include income from other sources such as interest, dividends, or rental income.
Both are critical. Revenue is important for understanding a company’s ability to generate income, while profit shows how well it manages costs. A company can have high revenue but still struggle financially if it cannot control expenses effectively.
