Revenue vs profit

Revenue and profit can often get mixed up in everyday conversation—with both often used to vaguely refer to the money made by a business (usually, from selling services or products).

Yes, the previous sentence technically covers both terms, but let’s get more specific. A business’ revenue is its income: the amount of money brought in before factoring in any expenses. You might also hear it called the top line, because it typically appears at the top of a financial document.

Fittingly, profit is often referred to as the bottom line, because it’s what the business has left after subtracting all costs from the revenue.

You decide to open a pop-up shop selling seashells for one night only. Your expenses are as follows: 

• $500 for 1,000 seashells
• $200 for two members of staff to help you sell them
• $100 to rent the store to sell them out of

Your expenses total $800. To make a profit, your revenue from selling shells needs to exceed this number. You bought each for 50¢, but you decide to sell them for $1 apiece.

Lucky for you, the shells are a huge hit, and they sell out in only a few hours. 1,000 shells, each sold for $1, gives you a revenue (or top line) of $1,000. You’ve spent $800, so we subtract that from your revenue to arrive at a profit (or bottom line) of $200.

In this example, it’s clear to see just how much both numbers differ. Had you sold shells at 80¢ or less, your revenue might look good, but your profit would be nonexistent: at best, you would break even. And at worst, you would lose money on this operation.

Our earlier example simplifies things, of course. A tightly run business would get even more specific in its accounting by differentiating between gross and net profit/revenue.

Gross revenue refers to the total amount of revenue, without factoring in deductions (e.g., returns and discounts). Net revenue takes these into account, providing a more ‘realistic’ figure. It’s important to note, though, that net revenue only accounts for these specific deductions, and not overall expenses — that’s a job for net profit.

To calculate gross profit, we subtract the cost of goods sold (COGS) from revenue. As its name might indicate, COGS pertains only to the costs directly tied to producing the goods—manufacturing, raw materials, etc. This metric can provide a good idea of the company’s efficiency in producing goods.

Net profit takes a more holistic view: it’s calculated by subtracting all costs (operating expenses, COGS, taxes, staffing) from revenue. Fittingly, this is truly ‘the bottom line’.

It’s not uncommon for companies’ expenses to outweigh their revenue—in other words, for them to operate at a loss.

Did you know that Amazon, which holds a valuation of nearly $2 trillion at the time of this writing, operated at a loss from its founding in 1994 until 2003? Though it counted its revenue in the millions (and billions) in these early stages, its expenses surpassed these figures as CEO Jeff Bezos targeted growth and reinvestment over profitability. 

Another phenomenon to note is that of high-revenue, low-margin companies: those that boast a high revenue, but relatively low profitability. A prime example is Walmart, which, in 2023, had over $600 billion in revenue. However, its net profit was $11.7 billion, representing a profit margin of just 1.9%. In other words, for every dollar spent, Walmart keeps 1.9c.

Of course, a profit in excess of $11 billion is still very impressive. Retailers like Walmart are able to achieve these margins through the sheer scale of their operations, offering low costs by dealing in enormous volumes of products.

Staying afloat in business requires a good understanding of profit and revenue. But these metrics aren’t useful only for store owners and directors—they’re also used by analysts to assess companies and pick stocks.

For instance, the price-to-sales (P/S) ratio, calculated by dividing market capitalization by revenue, indicates what an investor is willing to pay per dollar of revenue. A lower figure might indicate that a stock is undervalued, while a higher one may point to high growth expectations. 

Another popular metric is the net profit margin (net income / revenue x 100), touched on briefly in the Walmart example. This one is a measure of efficiency, telling analysts how much net income is generated per dollar of revenue. A higher margin may point to better cost controls and pricing power.

Revenue refers to the amount of money generated by a company in its day-to-day business—without taking into account any expenses.

Profit is ‘the bottom line’: the amount of money left over after all of those expenses have been subtracted from the revenue.

Yes! In this case, it’s said that the company operates on low margins: though revenue is high, so are the company’s expenses, which means that profit could be a mere fraction of the revenue. Businesses like retailers and restaurants typically observe this.

Note that the inverse could also be true: a company may have low revenue, but high profitability due to minimal expenses.

Net profit is calculated by subtracting all expenses from revenue:

• Net profit = revenue - expenses

While both metrics are critical in any business context, profit encompasses more information than revenue: it accounts for expenses, providing a better view of the business’s health.

Net profit is the true bottom line, obtained by subtracting all expenses from revenue. Gross profit only subtracts the cost of goods sold (COGS)—in other words, those directly involved in the production/procurement of goods.

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