Bottom Line Indicators For Your Business: Revenue Vs Profit
Let’s paint a picture. You are a very successful service provider who is always booked and busy. You know for a fact your consulting calendar is always full and your team is busy during the month. At the end of the month, you check your bank account but notice you don’t have as much cash as you thought. After checking the numbers from your booking system, you see clear as day you generated over $50,000 in gross sales but your bottom line is only $15,000. You feel some kind of way. That’s because your profit margins are trending low (gross revenue - cost/gross revenue). Your current net profit margin is only 30%. YIKES!
When it comes to business, many consultants and service providers have a hard time deciding which metric is more important: revenue or profit. This question has been on the mind of business owners for quite some time, but there is no clear answer as to how these two measures can be used in conjunction with each other. Revenue and profit are very important indicators of how your company is performing. While this topic may seem simple, the truth actually lies somewhere in between both sides of the argument. Neither one should be sacrificed over another; instead they need to work hand-in-hand with one another to help drive your business forward and increase profits. Let's take a look at what exactly we mean by "revenue" versus "profit" and why you shouldn't choose only one!
Revenue
Gross revenue is the total income generated from the sale of products or services. Revenue and sales are used interchangeably.
Profit
Profit is the amount remaining after all expenses have been accounted for. The best way to calculate profit is revenue minus expenses = profit.
Here’s an example:
Company ABC is a plumbing company. Here are their sales and expenses for the month of October.
Revenue: $50,000
Cost of sales: $15,000
Operating expenses: $20,000
Net Profit: $15,000
Here are 3 strategies for increasing profit:
- Know your numbers. Understanding your fixed and variable costs help identify areas for improvement and focus areas to monitor for decreases.
- Eliminate non-profitable services from your service menu. Focus on profitable products and services ONLY!
- Increase the frequency of customer purchases.
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