Revenues and profits are both extremely important to the success of a firm. The terms are sometimes used interchangeably by people unfamiliar with accounting terminology, however they are two distinct and different terms. Anyone working in the business world as an employee, manager or owner should understand these two terms and the significance they play in business.
Revenue, or turnover as it is sometimes known, is the total income a company receives. It is the total of all sales and other income. For example, if a firm had total annual sales in three divisions of $100,000, $50,000 and $200,000 respectively, plus investment income of $20,000, it would have a total revenue of $370,000 -- the total of these incomes. Revenue is a measure of income only; it does not account for expenses that a firm incurs.
The Encyclopedia Britannica defines profit as "the excess of total revenue over total cost during a specific period of time." Simply put, a firm's profits are its total revenues less its total costs. There are, however, other measures for profit. Gross profit is a measure of the firms sales revenues minus the costs of goods sold. Operating profit, also known as earnings before interest and taxes, is a measure of the gross profit less operating expenses.
Revenues and profits are both important measures of a firm's success. Generally, profits are regarded as being more important than revenues. This is because the ultimate goal of a business is to create profits for its owners. In some cases, however, revenue may be more important than profits. A professional services firm, such as an accountancy firm or an architecture firm, may place more emphasis on creating revenues than profits. This is because having high revenues can allow such a firm to hire more employees, which can allow the firm to grow larger and ultimately become more profitable in the long-term.
Revenues and profits may be related, but this is not necessarily the case. If, for example, a business increases its revenues without incurring additional costs, then the profits will increase with the revenue increase. If, however, a firm gains additional revenue, but as a result incurs additional expenses that exceed this profit, then the increased revenues will actually cause a decline in profits. Managers should, therefore, be cautious of focusing solely on increasing revenues as a means of increasing profits.
- Encyclopedia Britannica: Profit
- Financial Accounting; Jerry J. Weygandst et al; 2009
- California State University, Pomona; Overview of Accounting; Phillip R. Rosenkrantz
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