If your business just opened a new location, gross revenue can be a far more useful metric than net revenue because it indicates potential without the clouded judgment of the one time cost of opening that new location.
This does not mean you can afford to discount the importance of net revenue your actual profits. This is the best way for you, as a business owner, to make decisions of cost and worth. Even if a product or service is bringing in a lot of revenue, you can see after deducting all the expenses associated with that product, whether or not it is a profitable product or service for your business.
Often you will be able see where you can and cannot cut costs to make your business more efficient—and where you have greater profit-generating opportunities. Most lenders, from your local bank to the SBA to online lenders like OnDeck, look at gross revenue as a minimum qualification requirement. This means that like most investors, they want to know more about your potential for bringing in capital to your business. This helps lenders determine how much money is appropriate to lend to a particular business while using your business credit , personal credit , and cash flow to determine your ability to pay the loan back.
The example above shows how different income is from revenue when referring to a company's financials. Bottom line growth and revenue growth can be achieved in various ways.
A company like Apple might experience top-line growth due to a new product launch like the new iPhone , a new service, or a new advertising campaign that leads to increased sales.
Bottom-line growth might have occurred from the increase in revenues, but also from cutting expenses or finding a cheaper supplier. Accessed Mar.
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Revenue vs. Income: An Overview Revenue is the total amount of income generated by the sale of goods or services related to the company's primary operations. Key Takeaways Revenue is the total amount of income generated by the sale of goods or services related to the company's primary operations.
Income or net income is a company's total earnings or profit. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. Revenue is often referred to as the "top line" number since it is situated at the top of the income statement. Cost of goods sold refers to the direct costs involved in producing a company's goods. COGS typically includes the following:.
We can see from the COGS items listed above that gross profit mainly includes variable costs —or the costs that fluctuate depending on production output. Typically, gross profit doesn't include fixed costs , which are the costs incurred regardless of the production output.
For example, fixed costs might include salaries for the corporate office, rent, and insurance. However, some companies might assign a portion of their fixed costs used in production and report it based on each unit produced—called absorption costing. Gross profit is calculated by subtracting revenue or net sales from a company's cost of goods sold as shown below:. Both gross profit and net income are found on the income statement.
Gross profit is located in the upper portion beneath revenue and cost of goods sold. Net income is found at the bottom of the income statement since it's the result of all expenses and costs being subtracted from revenue.
Net income is synonymous with a company's profit for the accounting period. In other words, net income includes all of the costs and expenses that a company incurred, which are subtracted from revenue.
Net income is often referred to as the bottom line due to its positioning at the bottom of the income statement. Although many items can be listed on a company's income statement, depending on the company's industry, usually net income is derived by subtracting the following expenses from revenue:.
Additional income sources are also included in net income. For example, companies often invest their cash in short-term investments, which is considered a form of income. Also, proceeds from the sale of assets are considered income. As stated earlier, net income is the result of subtracting all expenses and costs from revenue, while also adding income from other sources. Depending on the industry, a company could have multiple sources of income besides revenue and various types of expenses.
Some of those income sources or costs could be listed as separate line items on the income statement. For example, a company in the manufacturing industry would likely have COGS listed, while a company in the service industry would not have COGS but instead, their costs might be listed under operating expenses. The general formula for net income could be expressed as:. A more detailed formula could be expressed as:.
Investors often hear the phrase: "A company posted top-line or bottom-line growth. Bottom line growth refers to a growth in net income since net income is listed on the bottom line of the income statement. Gross profit assesses a company's ability to earn a profit while simultaneously managing its production and labor costs. As a result, it is an important metric in determining why a company's profits are increasing or decreasing by looking at sales, production costs, labor costs, and productivity.
If a company reports an increase in revenue, but it's more than offset by an increase in production costs, such as labor, the gross profit will be lower for that period. For example, if a company hired too few production workers for its busy season, it would lead to more overtime pay for its existing workers. The result would be higher labor costs and an erosion of gross profitability.
However, using gross profit as an overall profitability metric would be incomplete since it doesn't include all of the other costs involved in running a successful business. On the other hand, net income represents the profit from all aspects of a company's business operations. As a result, net income is more inclusive than gross profit and can provide insight into the management team's effectiveness. For example, a company might increase its gross profit while simultaneously mishandling its debt by borrowing too much.
The additional interest expense for servicing the debt could lead to a reduction in net income despite the company's successful sales and production efforts. Gross profit can have its limitations since it does not apply to all companies and industries. For example, a services company wouldn't likely have production costs nor costs of goods sold.
Although net income is the most complete measurement of a company's profit, it too has limitations and can be misleading. For example, if a company sold a building, the money from the sale of the asset would increase net income for that period. Investors looking only at net income might misinterpret the company's profitability as an increase in the sale of its goods and services. It's important to note that gross profit and net income are just two of the profitability metrics available to determine how well a company is performing.
For example, operating profit is a company's profit before interest and taxes are deducted, which is why it's referred to as EBIT or earnings before interest and taxes. However, when calculating operating profit, the company's operating expenses are subtracted from gross profit. Operating expenses include overhead costs, such as the salaries from the corporate office. Like gross profit, operating profit measures profitability by taking a slice or portion of a company's income statement, while net income includes all components of the income statement.
If gross profit is positive for the quarter, it doesn't necessarily mean a company's profitable. For example, a company could be saddled with too much debt, resulting in high interest expenses, which wipes out the gross profit, leading to a net loss or negative net income. Retail giant J. Penney has been one of the many retailers that have experienced financial hardship over the past several years. Below is a comparison of the company's gross profit and net income in , as well as an update from Although J.
This real-life example demonstrates why it is critical to analyze a company's financial statements using multiple metrics, to accurately determine whether the company is performing well or experiencing losses.
Penney has continued to struggle.
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