Revenue vs Profit: What is the Difference and Why Does it Matter?

Revenue vs Profit: What is the Difference?

The terms revenue and profit are often used interchangeable by people. Of course, not all of us are accountants or financial gurus. However, if you are out there trying to make money with a side hustle or small business, it is quite important to understand revenue vs profit and how that effects your cash-flow.

Revenue vs Profit Explained

Profit: The common sense understanding for non-financial people is that profit refers to the sales/revenue minus the cost of goods/services sold.  Revenue: Revenue refers to the total sales or the total revenue from selling goods or services. It is very straight forward.

Expenses incurred while running your business

You must look at expenses while running your business when determining profit: 1. Cost of Goods Sold 2. Operating Costs 3. Taxes 4. Royalties/Franchise Fees

Breaking even

Breaking even means that the owners are not able to make an income from the business, nor can they reinvest money back into the business. A business might be able to break even for a while, but eventually they need to make a profit to stick around.

Revenue vs Profit in Personal Finance:

When it comes to a normal working individual, revenue is your income. These include total wages, salaries, and revenue. Basically, how much money you make every month. When it comes to expenses, most of us track the major expenses like rent/mortgage, food, loan payments, etc.

What Can Be Learned From the Business Model?

All of your expenses have to be absorbed by the income/revenue that you have. If your income covers your expenses with some left over, then you are profiting every month. However, if your income does not cover your expenses you are operating in the red and accruing debt.

Budget Oversights: The Number One Reason Many Aren’t Profiting

Revenue is just a starting point. Where people get into trouble is in the expense category. It is critical that you pick a budgeting method that works for you and stick to it so that you know where your money is going and can control how you want to spend it.

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