Revenue vs Profit

What if I told you that my business made $1M dollars in sales yet made $200K in profits. Are you wondering how that can be? Why isn't one the same as the other? Many business owners find themselves confused and tend to think that revenue equals profit. That's never the case. It is key to understand each of these terms, the implications of each on the business and most importantly understand the difference between the two.

The revenue is what you sell, your product or service or both. It is anything your business provides to your consumer and received payment in return in the form of currency. Profit is what the business actually makes after all costs and expenses are paid for excluding taxes. Usually a business owner would then decide to draw on these funds for themselves. Both of these are important to the business because together they reveal the financial health of the business. Revenue will tell you as an owner how well sales are and if there is a need to improve. Profit will determine whether the business can continue to exist for the foreseeable future. If a business is not making a profit over an extended period of time then the business will not survive for long. 

The difference between the two, the $800K difference in the example I presented in the beginning, is vital. It is vital to you as a business owner because this is what will tell you how you are investing the sales the business makes. Some of it is to create your product or provide your service. Some of it is to pay for the expenses to run the business. Without understanding this difference, as a business owner you don't know where you need to cut back or why. Simply understanding why revenue will never equal profit is the first step in truly understanding your business finances.