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# Revenue vs Profit

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Imagine that you own a small shop that sells chocolate bars. The price of each chocolate is $2, and in one day, you manage to sell 1000 chocolates. That means you make$2000 dollars in a day. In a month, you would make $60,000, and in one year,$720,000. But does all of that money belong to you? What about the cost? What is the difference between revenue vs. profit?

The difference between revenue and profit is that revenue counts all the money you make, whereas profit takes into account the cost of running your business. If you buy a bar of chocolate for $1 and sell it for$2, then your revenue would be $2000 a day, but your profit would only be$1000.

Read on and find out how revenue and profit are calculated and how you can use them to run your future business!

## Revenue vs Profit Definition

The revenue vs. profit definition refers to the difference that exists between revenue and profit. These two terms are often confused with one another.

Revenue is the amount of income an enterprise generates through sales, fees, memberships, rent or lease payments.

It includes all income from business operations and is almost always the top line of a firm's income statement. This means that all other measurements of income are refined from this broad figure, which is often called gross revenue.

For the largest corporations, gross revenue can be in the tens of billions of dollars per year.

Basically, revenue includes any income flow that a company receives as a result of selling its products.

Profit is a more complex term and involves subtracting the costs of operating the business from the gross revenue.

Profit is the difference between a firm's total revenue and a firm's total cost.

There can be many levels of profit because of the many costs that can be deducted. Profit is typically found at the bottom of a firm's income statement after all costs are deducted.

For some simple firms, such as small sole proprietorships with a single owner, profit is the 'take-home' pay enjoyed by the owner. More complex forms include salaries for the owners as part of their costs, meaning the 'take-home' pay analogy is only partially accurate.

## Difference Between Revenue and Profit

The difference between revenue and profit is that revenue includes all the income that a firm makes during a certain period of time. On the other hand, profit includes only the income a firm makes after all the cost has been covered.

Let's take a look at the revenue vs profit by looking at a perfectly competitive firm.

Fig. 1 - Revenue of a perfectly competitive firm

Figure 1 shows the revenue for a perfectly competitive firm - the shaded blue area. A perfectly competitive firm faces a horizontal demand curve that is equal to the firm's marginal revenue.

Marginal revenue is the firm's revenue from selling an additional product.

The supply curve of a perfectly competitive firm is equal to the marginal cost.

Marginal cost is the cost of producing an additional unit of product.

Perfectly competitive firms are firms that face a horizontal demand curve as there are many sellers in the market competing with them. If you need to refresh your knowledge of the perfectly competitive firm, click here:

- Perfectly Competitive Firm.

A perfectly competitive firm is part of a perfectly competitive market. Click here to find out all there is about a perfectly competitive market:

- Perfect Market.

The point where MR (demand) intersects supply is known as the point where you can find the equilibrium price and quantity. Basically, the amount of quantity the firm sells and the price it sells it for.

We can find the total revenue of the firm by multiplying the entire quantity the firm sells by its price.

$$TR=P_m \times Q_m$$

Fig. 2 - Profit of a perfectly competitive firm

Figure 2 shows the profit that a perfectly competitive firm incurs. Notice that when considering profit, we also consider the average total cost the firm faces when producing that particular level of output, in this case, $$Q_m$$.

## Cost Profit and Revenue Functions

Let's consider cost, revenue, and profit function in detail.

The cost function is used to measure the cost of producing a certain level of output, given that there are some factors of production that the firm should pay for to produce.

A firm has two main types of cost that it faces. These are fixed cost and variable cost. Those two costs make up the total cost of a firm.

Fixed cost includes expenses a firm should pay regardless of its production level.

Examples of fixed costs include rent, interest payments, salaries, utility bills, insurance, etc.

That is to say that regardless of whether the firm only produces 10 units of output or 1000 units of output, the firm still will have to pay the fixed cost.

- Fixed costs.

Variable costs are expenses that a firm faces, and they change as the total output produced by the firm changes.

Some examples of variable costs include the price of raw materials, delivery costs, packaging supplies, etc.

- Variable costs.

The cost function of a firm may then be expressed as:

$$TC = VC + FC$$

Where TC is the total cost, VC is the variable cost, and FC is the Fixed Cost.

Revenue refers to all the money that the firm makes. So, to make revenue, a firm should sell a certain amount of goods at a certain price. Therefore, the revenue is a function of quantity and price.

The revenue function can be expressed as follows.

$$\hbox{Total Revenue}=\hbox{Price (P)}\times\hbox{Quantity(Q)}$$

For example, a firm that makes chocolate bars sells 2,000,000 chocolate bars in one year. What is its total revenue if the price it sells them for is $2? The total revenue of the chocolate company is as follows: $$\hbox{Total Revenue}=\hbox{Price (P)}\times\hbox{Quantity(Q)}$$ $$\hbox{Total Revenue}=\2\times2,000,000=\4,000,000$$ A firm's profit is a function of its revenue and cost. Therefore, we can express the profit function as follows. $$\hbox{Profit}=\hbox{Price (P)}\times\hbox{Quantity(Q)} -(\hbox{Variable Cost} + \hbox{Fixed Cost})$$ ## Net Revenue vs Gross Profit Sometimes, people think net revenue is the same as gross profit; however, there is a difference between net revenue vs. gross profit. Net revenue is gross revenue that has been adjusted for refunds, returns, and discounts. In the real world, some sales are not final, and customers can return items for full or partial refunds. For example, someone didn't like their Amazon order and might decide to return it, for which the company has to pay money back. Customers may also be able to submit coupons or receive rebates (cash back). These reduce revenue but are not considered costs of production. Thus, net revenue is a more refined and accurate look at a firm's income. On the other hand, gross profit is part of the net revenue that also includes the cost of goods sold (often abbreviated as COGS). Gross profit is a firm's net revenue minus the cost of goods sold (COGS). The cost of goods sold includes the cost of inventory, hourly labor, utilities, and supplies. It covers most physical production costs but not advertising, consulting fees, or subscriptions to business publications, trade groups, or software. Therefore, gross profit often needs to be adjusted further to find what many would consider being true profit. Net profit is the term for profit after all expenses have been deducted, including taxes and the interest paid on any outstanding debt. ## Revenue vs Profit vs Turnover Although they are often used interchangeably, there are some differences between revenue vs. profit vs. turnover. Revenue is the firm’s total income from business practices. Profit is the amount of revenue left for the firm’s owners after all costs have been deducted. Turnover refers to the sales a firm makes within a certain time period, meaning how much inventory is sold. Turnover and revenue are often compared as a percent of the firm’s total inventory. A high dollar amount of revenue may be unimpressive if it is only a tiny percent of the entire stock. Ideally, firms want to have substantial inventory turnover to show that their products are in high demand. A small firm with a high turnover may be seen as a better business investment than a more prominent firm with a lower turnover. Turnover is related to whether a business sells durable or more perishable goods. Supermarkets, for example, must maintain a high turnover to prevent food from going bad. Car dealerships may need more time to sell number-year models before they lose value. Industrial supplies and equipment, however, may maintain their value while sitting for more than a year, meaning a lower turnover is okay for business. ## Revenue Vs Profit - Key takeaways • Revenue is the amount of income an enterprise generates through sales, fees, memberships, rent or lease payments. • Profit is the difference between a firm's total revenue and a firm's total cost. • Marginal revenue is the firm's revenue from selling an additional product. • Marginal cost is the cost of producing an additional unit of product. ## Frequently Asked Questions about Revenue vs Profit Profit is better as profit is all the money you make after having covered for cost. Profit can not be higher than revenue. Profit can be equal or lower than revenue. Revenue is not a profit because it does not consider the costs. It depends on the industry and the cost of the business how much of revenue is profit. Revenue is calculated by multiplying the total number of goods sold to its selling price. ## Final Revenue vs Profit Quiz ## Revenue vs Profit Quiz - Teste dein Wissen Question ___ is the amount of income an enterprise generates through sales, fees, memberships, rent or lease payments, et cetera. Show answer Answer Revenue. Show question Question ___ is the difference between a firm's total revenue and a firm's total cost. Show answer Answer Profit. Show question Question A company has made 2 million dollars last year from selling cosmetic products. This is considered as the firm's ___. Show answer Answer Revenue. Show question Question What is the difference between revenue and profit? Show answer Answer The difference between revenue and profit is that revenue includes all the income that a firm makes during a certain period of time. On the other hand, profit includes only the income a firm makes after all the cost has been covered. Show question Question ____ is the firm's revenue from selling an additional product. Show answer Answer Marginal revenue. Show question Question ___ is the cost of producing an additional unit of product. Show answer Answer Marginal cost. Show question Question What is the formula for the total revenue of the firm? Show answer Answer $$\hbox{Total Revenue}=\hbox{Price (P)}\times\hbox{Quantity(Q)}$$ Show question Question The cost function is used to measure the cost of producing a certain level of output, given that there are some factors of production that the firm should pay for to produce. Show answer Answer True. Show question Question ___ includes expenses a firm should pay regardless of its production level. Show answer Answer Fixed cost. Show question Question The expenses a firm incurs on interest payments are considered as a ___. Show answer Answer Fixed cost. Show question Question ___ are the expenses that a firm faces, and they change as the total output produced by the firm changes as well. Show answer Answer Variable costs. Show question Question What is the formula for the cost function? Show answer Answer $$TC = VC + FC$$ Show question Question What is the revenue function? Show answer Answer $$\hbox{Total Revenue}=\hbox{Price (P)}\times\hbox{Quantity(Q)}$$ Show question Question If a firm that makes chocolate bars sells 2,000,000 chocolate bars in one year. What is its total revenue if the price it sells them for is$2?

\$4,000,000.

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Question

What is a firm's profit function?

$$\hbox{Profit}=\hbox{Price (P)}\times\hbox{Quantity(Q)} -(\hbox{Variable Cost} + \hbox{Fixed Cost})$$

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