Revenue and profit are two important parameters in any business. Revenue is the sum of money that a business generates from selling its goods or services whereas profit is the amount of money that is earned out of the revenues after deducting all the expenses relating to the generation of goods or services. Out of revenue vs. profit, profit stands out to be a better measure of efficiency, success, and sustainability of a business.
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What is Revenue?
Revenue is commonly referred to as sales, but total revenues of a business also include other incomes from investment, scrap selling, etc which may not be related to the main operations of the business. No expenses are considered for calculating the revenues and therefore, it is also known as gross income / revenue.
Revenue – A Measure of Efficiency / Sustainability?
Revenues are a very vital part of any business. but they are not considered a good measure of efficiency for any business because higher revenues do not always assure higher profits.
If a product / service is sold below its cost of production, unlimited revenues can be achieved accompanied with unlimited losses. Are these revenues worth? No, because the ultimate goal of a business is not to generate revenue but profits. Revenues are an easy way of looking at a company’s growth. Increasing revenues are good till they are able to cover all the expenses and leave some profits.
What is Profit?
Profit is the surplus of total revenues after deducting all the expenses. It is the real measure of efficiency or success of any business. No business can sustain for long without profits. Profit for a company includes all types of profits whether they are generated out the main activity of the business or other incomes such as a sale of machinery, scrap, interest, dividend, etc.
Profit – A Measure of Efficiency / Sustainability?
Profits are life blood for any business to sustain and grow. If we compare revenue vs. profit as a measure of sustainability, profit will be the winner. At the same time, profit maximization is not the only way of looking at the welfare of a company. It is also equally important that where that profit has come from. Suppose, a paper manufacturer earns a total profit of $500 million and $600 million of profit is earned from other activities like interest, dividend, sale of machinery etc. This simply means that the main activity i.e. paper manufacturing is giving a loss of $100 Million. Here, the sustainability of this business is questionable because it is making losses in the activity / business for which its existence is in place.
Goal of Business: Increasing Revenue or Increasing Profits or Increasing Profit Margins
There are three probable goals of a business with their pros and cons.
Increasing revenue as a goal should not only focus on increased sales but it should also focus on the price at which the revenue is increased. The price of the product should cover all the increasing expenses also.
Increasing profits may have a direct link with the increasing revenues. Higher the revenues, higher can be the profits. Please note here that the rate of increasing the revenue and profits may differ or probably be less in the case of profits.
Increasing profit margin is different ball game altogether. Profit margins are increased when at the rate of increasing revenues is greater than the rate of increasing expenses. Effectively, better profit margins can be achieved with profit maximization and cost minimization together.Last updated on : March 16th, 2018