Revenue vs income
Accounting terminology can be pretty confusing, especially if you’re new to running a business, but knowing your revenue from your income can be the difference between a thriving business and one that’s struggling.
Accounting terminology can be pretty confusing, especially if you’re new to running a business, but knowing your revenue from your income can be the difference between a thriving business and one that’s struggling.
Revenue and income, AKA…
Accountancy jargon can be mind-boggling, not least because both revenue and income appear to have many different names that essentially mean the same thing.
Revenue is often called:
- Total sales
- Turnover
- Gross income
- The top line
Income is often called:
- Profit
- Net income
- Net earnings
- The bottom line
We don’t want to confuse you any more, so to keep things simple, we’ll just refer to them as revenue and income. Now that’s cleared up, let’s dive in and find out what they mean…
What is revenue?
Revenue is the total amount of money you make from selling goods or services minus any discounts, refunds or deductions for returns. It’s usually used to describe sales from a company’s main operations – so, if you’re a furniture maker, your revenue will be the amount of money you’ve earned from selling your chairs, tables, cabinets etc.
Revenue can also include money from other sources, like interest, dividends, commissions, or rent received for leasing out machinery or property.
The term revenue is typically used to describe money generated by your business activities over a certain time period – so it could be revenue for a specific month, quarter or year.
Let’s use the furniture-maker example again. Your total sales of furniture for one quarter was £20,000. However, you also offer a sofa re-upholstery service that earned you £2,000 during that same period. So, your total revenue for that quarter was £22,000.
Your revenue always sits at the top part of your income statement – a report that shows your business’s financial performance during a certain period – that’s why it’s known as the ‘top line’. So, if a company has an increase in sales, and therefore revenue, it’s experiencing ‘top-line growth’.
How is revenue calculated?
In its simplest form, revenue can be calculated using the following formula:
Sales price x units sold – discounts, refunds, returns = revenue
In other words, “how much did you sell during this period?”
What is income?
Income is what’s left after you subtract expenses from your revenue. Expenses are the costs of running your business, for example, raw materials, rent, tax, utility bills, employee salaries, interest, loans, business insurance etc.
Your income can be found at the bottom of your income statement under a list of expenses that have been deducted from the revenue. When people talk about the ‘bottom line’, they’re referring to the net income – in other words, the total amount of earnings left after expenses.
How is income calculated?
Your income can be calculated using this simple formula:
Total revenue – expenses = income
In other words, earnings from sales minus the cost of goods sold (COGS) and all other expenses.
What’s the difference between revenue and income?
As we’ve explained, revenue is the total amount of earnings from your sales, secondary income and gains. Gains are other types of income, for example, a one-off sale of a large asset like a property, land or a vehicle.
Income is the total amount of money left after expenses and losses have been deducted from your revenue. Losses can include the one-time costs for things like conveyancing fees for selling a property compensation and legal costs involved with a lawsuit.
Your income figure will always be less than your revenue figure:
(Revenue + Gains) – (Total expenses + Losses) = Net Income
While the top line revenue figure can show how effective your business is at generating sales, the bottom line income figure shows how efficient your business is with managing its spending and operating costs.
Why is it important to know my revenue and income figures?
Both figures are important in showing the overall financial health of your business. By looking at the figures together you’ll get a much better idea of how your business is faring – in other words, its profitability. If there’s a massive difference between your revenues and income, your business could be in serious trouble.
For example, you may have a high revenue through lots of sales, but if too many expenses are affecting your bottom line, those sales become unprofitable and your business may no longer be sustainable. Ideally, the aim should be to increase revenue while reducing expenses in order to make a healthy profit.
Investors or potential buyers will also pay close attention to your revenue and income to get a clear idea of how your business is performing.
Types of revenue
Revenue can be broken down into two parts:
- Operating revenue – the amount of money received for your primary business activity: selling goods or services
- Non-operating revenue – revenue earned from secondary sources like commissions, royalties, rental income or one-off gains like the proceeds from selling a property
Examples of revenue:
- An author gets an operating revenue from book sales and a non-operating revenue from any royalties received
- A buy-to-let investor gets an operating revenue from their rental income. If they decide to sell the property, the proceeds will be shown on the income statement as a gain, ie: a non-operating revenue
Frequently asked questions
What is an income statement?
An income statement, or profit and loss statement, is a document that shows the financial performance of a business or company over a certain period of time, for example, a month, a quarter or a year.
An income statement will show:
- Total revenue
- Expenses
- Gains
- Losses
- Net income
An income statement gives a valuable insight into how efficiently you run your business. You can use your income statement to:
- See, at a glance, the profits and losses your business has made in a certain period of time
- Compare profits and losses over different years to identify trends and work out new strategies
- Make comparisons with competitor companies in the same industry
- See which areas can be improved and find ways to reduce expenses
Is revenue the same as cash flow?
No. Cash flow is the actual money that moves in and out of your business each month.
When a customer pays you and the money goes into your bank account it’s counted as an inflow. When you pay a bill and the money leaves your account, it’s an outflow.
A positive cash flow means you’re making more money than you’re spending – you’ll have extra money to re-invest into your business or pay for unexpected expenses. A negative cash flow means you’re spending more money than you’re making which could mean you struggle to pay your bills.
You can have a high revenue and a poor cash flow. For example, if you send out an invoice, it will be counted as revenue. But you may not be paid for 30 days. So, on paper it may look like you’re making a profit, but in terms of available money, you won’t actually receive the cash until you’re paid at the end of the month.
How can I improve my bottom line?
By keeping track of your revenue, expenses and income, you can make positive changes that could improve your bottom line. The aim is to increase revenue while reducing expenses.
Here are a few ways to improve your business’s bottom line:
Find new opportunities
Don’t just rely on the same old business model. Look for new opportunities to expand your business and tap into new markets. Consider new products and services and a change in marketing strategy to find new customers.
Focus on your brand
Your business brand needs to have a clear identity and purpose. Today’s customers are far more brand-aware than ever. Sustainability is a big selling-point as is excellent customer service. A customer-centric business that focuses on a customer’s needs and experience is far more likely to see a growth than one that is only concerned about the bottom line.
Learn to fail and move on
If a strategy isn’t working, don’t keep ploughing money into it. If you can accept that an idea has failed early on, learn from it and quickly move on. It will help protect your bottom line and recover any lost income in a shorter space of time.
Consider outsourcing
A mixed workforce of full-time workers and freelance contractors could cut down your overhead costs. Hiring freelancers could also free-up your key workers so they can focus on more valuable tasks, which in turn could boost productivity.
Cut back on expenses
Even small changes could make a difference. Cut the cost of your energy bills by using energy-saving devices and switching to a cheaper tariff.
Shop around to find cheaper business insurance and only pay for the cover you need.
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Mubina Pirmohamed - Business and landlord insurance expert
With almost 15 years’ experience in the insurance industry, Mubina is an expert from one end to the other. From leading the introduction of new products, marketing them, innovating them, all the way to handling claims with customers. At some point in her career, she’s done it all.