Income and revenue are often used interchangeably. The fact is, they are quite different and when calculated, can provide an accurate picture of a person’s or business’ financial state. Both income and revenue are considered when making financial decisions. Knowing and understanding the role each one plays when making those financial decisions is important. The differences between each are significant enough to make them separate entities and not able to be interchanged. Being able to understand both revenue and income will allow you to effectively manage your business.
The Revenue of Business
Revenue is the amount of money that is earned by the main operations of the company. This can include payment for services provided or products sold. Revenue is considered to be at the top of the financial statement. It is also referred to as gross income. The revenue of a business is the total amount of all types of income that is generated by the business before any expenses or bills are deducted. This may or may not include investment gains. While investment gains are income, they are not generated through the main operations of the business. Instead, they are earned through investment opportunities. Investment gains are often funneled back into the business to maintain steady growth.
The income of a business is what is left after all of the operating expenses have been deducted from the gross revenue. The final figure is referred to as net “profit/income”. It is the basic bottom line after all of the bills have been paid and gives a more accurate picture of the state of the company’s financial health. As the “bottom line”, it is the base of the financial statement and shows where most of the money goes. Net income is normally the figure that is used when a company applies for a loan or any line of credit. For many small business owners, the net profit is often reinvested right back into the business in an attempt to expand it or help it to grow at a much faster rate.
Why It’s Important to Know the Difference
Many people confuse revenue and income, mistakenly believing they are the same thing. While they are both types of income, they represent dramatically different amounts. Gross revenue shows the business’s ability to earn money due to how it operates its business. Net income, on the other hand, shows what it costs the company to earn that gross amount. Keeping operating costs to a minimum is the key to having a profitable bottom line. The key is to earn as much as possible while having few expenses. This increases net profit and makes it more comparable to the gross revenue.
Revenue and income are both important indicators of a business’s financial standing. If you are a business owner or someone who works in a management position, it’s essential that you understand the definition of both and what each one means to your business. Having this knowledge will also help you better understand your financial statements and the information they contain.