It is common for business owners in South Africa to lament, “I don’t understand why my company is making a good profit and yet doesn’t reflect in the bank balance.”
This reminds me of an old saying that goes, it’s not how much you make, but it’s what you keep that matters. Put differently, what you make is Revenue and what you keep is Profit.
Revenue can be a sign that your company is heading in the right direction, but not yet making a profit. Maybe still only breaking even. This is because it takes a lot of time, money, and effort for a new business to generate profits.
The fundamental difference between revenue and profit is that a company can increase its revenue but still register a net loss of earnings. The easiest way to understand when each term is used is to view a typical income statement, also known as a profit and loss statement.
What is revenue?
Some business owners call it revenue sales while others make the mistake of calling it profit. In fact, revenue is the income earned by a business over a period of time, for instance over a period of one month.
Revenue is often referred to as the “top line” because it sits at the top of the income statement. Essentially, it is the income a company generates before any expenses are subtracted from the calculation.
To illustrate, we will calculate the total revenue raised by Kwadwesi Energy drink selling 2,000 units priced R30 each is 2,000 x R30 = R60,000.
You may ask: “Is the R60 000 not gross sales?” Revenue is sometimes called sales, sales revenue, total revenue or turnover. The most important point I want to make is, revenue is not profit.
In comparison, sales are the proceeds a company generates from selling goods or services to its customers:
In accounting terms, sales comprise one component of a company’s revenue figure.
On an income statement, sales are typically referred to as “gross sales.”
A company may also report “net sales,” which is the result of subtracting any returned merchandise from gross sales. Retail companies tend to report net sales as well as revenue.
Example of a business chasing revenue
If you are currently selling 10,000 units with a R5 margin but could increase sales to 15,000 by reducing margin to R3, then your gross profit has fallen from R50,000 to R45,000. You may have increased your sales by 50% but this has damaged your profit.
Profit is what most people mean when they say when you do A and B it will affect your bottom line. It is also referred to as net income on the income statement.
Gross profit is revenue minus cost of sales (goods)
There are variations of profit on the income statement that are used to analyse the performance of a company.
Operating profit is gross profit minus all other fixed and variable expenses associated with operating the business, such as rent, utilities, and payroll.
Revenue is vanity and profit is sanity but cash is king
The phrase cash is king rings true for many businesses who enjoy growing sales but watch their cash flow get worse. Here is why:
Most business owners make the mistake of celebrating revenue and neglect keeping a close eye on expenses. They forget that costs need to be properly recorded in order to determine if your business is making a profit or loss.
Let MGT help you with that. From the revenue derived from sales, loans and interest on savings, to the costs of running your business like buying stock, paying wages and rent; all will be properly recorded.
To find out how simply email firstname.lastname@example.org