Operating income and revenue both show the money that a company makes. However, the two numbers are different ways of expressing a company’s earnings, and they have different deductions and credits involved in their calculations. The main difference is that revenue is a company’s income before deducting expenses, while operating income represents the profit after subtracting expenses. Revenue is the most basic yet important indicator of a company’s profitability and its overall financial performance. It is a critical measure of financial performance that reveals how well a company can generate money from its primary business operations.
- In a company’s income statement, revenue typically appears near the top.
- Earnings are considered one of the most critical determinants of a company’s financial performance.
- It’s also important because businesses are valued differently using one number versus the other, and because only net income is taxable.
While there are some similarities between revenue and income, they aren’t the same. Sure, revenue is the money you receive for selling your products, but until you subtract expenses, you do not know what your profit will be. Net income, by definition, is profit as that is your “take-home pay” after you have paid out any expenses. Note that the net income is a lower number than the total revenue, which makes sense because net income is calculated by subtracting expenses from revenue.
What Is Income?
The gross profit, or gross profit margin, is the percentage of each dollar of revenue from which costs are subtracted. While income is the money a company makes after accounting for expenses and other costs. Understanding the difference between revenue and income is essential to accurately assess a company’s financial health and make informed business decisions.
The “top-line” or “revenue” of a company is the total amount of money brought in by a company. This total is represented on an “income statement”, which is a document that has a complete calculation of all money that comes in and goes out of a business. In business, your total revenue is the amount of money your company has made during a specific period of time. However, income is what remains after you subtract all costs, expenses, and taxes from the revenue. Understanding the relationship between your company’s revenue and income gives a true picture of your business’s standing and allows you to analyze where you can improve.
What Are the Types of Revenue?
Conversely, net income is revenue minus all expenses, including operating expenses and nonoperating expenses, such as taxes. You cannot possibly make representative month-on-month forecasts of your business without a sound grasp of how revenue breaks down to income on your balance sheet. For gross income, ensure your accounting team has a grasp of the different areas of expense.
Accounting teams need to be sure to include all relevant revenue streams in the top line or total revenue. And there needs to be a clear understanding of all the different expenses that must be deducted in order to get to the bottom line. Any discrepancies and the wrong picture of the company’s health can be projected to customers, investors and the authorities. Revenue is the total amount of money earned by a company for selling its goods and services. Companies usually report their revenue on a quarterly and annual basis in their financial statements. A company’s financial statement includes its balance sheet, income statement, and cash flow statement.
Revenue is often called the top line of the business, as it is the first line you see when looking at an income statement. An income statement is a document that has the complete calculation from revenue down to income. Different businesses use different measurements for both revenue and net income.
How to Calculate Income
Looking at an income statement, the difference between revenue vs profit vs income becomes more evident. While these are ordinary small business expenses, they don’t all apply to all companies. Applicable expenses for your business depend on its size, your company type, the industry you operate in, and your specific accounting practices. Income taxes are a significant source of revenue for individual states and the federal government, accounting for nearly 50% of federal revenue. Hawaii has 12 tax brackets, while Kansas and six other states have only three.
For most investors, the gross profit and operating profit are two calculations they are most interested in viewing. From here, they can see how much you are spending on each part of your business and how viable your revenue model is. Historically companies like WeWork might do some creative accounting and move costs out of the operating expenses category to seem more profitable than they are. The term revenue refers to the total amount of money generated from either selling a product or offering a paid service. Income is the final step in calculating your income statement, as it is the profit or loss you have after subtracting all expenses.
Revenue is the amount of money your business earns, while expenses are the money you spend. Tom gave his accountant all the receipts from sales at the end of the year, as well as invoices and receipts for employee wages, supplies, energy, food, and drink costs. His accountant took what training is needed to become a bookkeeper all the receipts and told Tom that his net income was $125,869. This overview will help you distinguish between revenue and income and help you understand how they differ. Companies can grow their net income and EPS by cutting costs, even if revenues are flat or decreasing.
Revenue is calculated by multiplying the price to the number of units sold. Another distinction between the two is their placement in a company’s financial statement. Sometimes these placement terms are used instead of both “revenue” and “income” in business communications.
Revenue vs. Net Income: Key Differences
For corporate entities and accountants, income and revenue each represent a different type of incoming cash and each results in different placement on the financial statements of a company. Income is the money left for business after it subtracts expenses and costs from its revenue. It is also known as “net profit.” Revenue is the amount of money earned through any business. A business earns this money by doing activities like selling a product or a service or by an indirect means.
There are several ways to calculate income, but generally, it equals total revenue minus total cost in producing a product or service. No, especially when it comes to accounting terminology, it is very important to differentiate. Revenue is the total amount earned from sales, while income is revenue minus all expenses. Income, revenue, and earnings are probably the three most widely used concepts in accounting and finance.
Operating revenue is defined as the money a company earns from conducting its central business operations. For example, if your company sells furniture, your operating revenue is the money earned from those sales. If, during a particular time period, you also sell off a warehouse you are no longer using, the proceeds of that sale would not count towards operating revenue. As the JCPenney example illustrates, the difference between revenue and operating income shows why analyzing financial statements can be challenging. It’s always prudent (and recommended) to consider multiple metrics to determine a company’s profitability before making any investment decisions. Operating expenses include selling, general, and administrative expenses (SG&A), depreciation, and amortization.