Lost Revenue vs. Lost Profits

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Lost profits and lost revenue both hurt a company's results. However, one of these losses is more damaging than the other because of where it is found on the income statement. Still, profits are profits and revenue is revenue, and both are accounting items. Cash is the ultimate measure of value, not accounting income.

Lost Revenue

Revenue is money generated by a company either through the sale of goods or services. The revenue of a company is found on the income statement. Lost revenue definitely impacts a company; however, one dollar of lost revenue does not equal to one dollar of lost income. Each dollar of revenue has certain expenses that goes along with it, so the return to shareholders after costs that are included is a lot less than one dollar. Lost revenue can occur for many reasons, including breach of contract, running out of inventory, manufacturing plant malfunctioning and the production of flawed products.

Lost Profits

The profits of a company represent the income left over to shareholders or the owners of the company. To calculate profit, you have to take the revenue of a company and subtract all of the expenses, including interesting expense and taxes. This information is found on a company's income statement. Since profit is the last line on the income statement, a one dollar loss in profit impacts shareholders' returns by one dollar. Lost profits occur when a partner breaches a contract that impacts a company's bottom line.

Impact on a Company

The big difference between the two is the impact on the company. One dollar of lost profits is much more costly to a company than one dollar of lost revenues. This is because profits are the next amount shareholders receive while many expenses still have to be subtracted from revenues. Depending on the company, a lost revenue of one dollar can actually just cost a company 10 cents on the bottom line. But again, a company's profit margin varies from industry to industry, and the ultimate cost to the shareholders can be very different.

Accounting Measures

One cautionary note is that both revenue and profits are measurements for accounting income. A company is ultimately valued on its cash flow, not the income it generates. Accounting income just helps investors get a better idea of future cash flow. Dividends and share repurchases, the two main ways to return money to shareholders, are paid from cash, not accounting income. One way to better understand lost revenue is understanding the profitability of that lost revenue and the impact it has on cash. If the revenue lost was not profitable anyway, then it will actually benefit the company. Profits are a lot more damaging, but it is always good to get a perspective on the profits from a cash perspective, especially when the respective cash would have been received.

References

About the Author

Alex Shadunsky has a bachelor's degree in finance and is pursuing a Master of Business Administration from Indiana University. He has worked at Briefing.com as a junior equity analyst specializing in health-care stocks.

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