What is the difference between Income and Revenue?
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If you are running a business, you need to understand some key accounting terms. Two of the most important terms used by your accountant are income and revenue.
The terms income and revenue mean very much the same in everyday life, but they have subtly different meanings in the world of business. For a small business owner managing his or her books, the difference is an important one, and can provide some important insights into the business
Both revenue and net income are useful in determining the financial strength of a company, but they are not the same. Revenue is known as the top line, and indicates how effective a company is at generating sales and revenue.
It does not consider the costs of gaining those sales, which have to be deducted before the income figure can be calculated. Income is known as the bottom line.
Income = revenue – costs
Both top and bottom line figures are important to understand what is really going on in your business, and it is just as important to be able to understand how each is calculated.
The basic revenue figure will be recorded on the top of the company balance sheet and represents all the cash coming into the company, less the cost of any returns - or any other income that was clawed back for any reason.
Revenue is, therefore, simply the total amount of income generated by the sale of goods or services by the company, and often referred to as the top line because it sits at the top of the income statement. It refers to a company's gross sales, or the income the company generates before any expenses are taken out. Therefore, when a company enjoys "top-line growth," the company can be seen to experience an increase in gross sales or revenue – but it may not be more profitable as a result and, in fact, the income may fall if costs increase at a greater rate than new sales generated.
It is also important to realise that revenue is distinctly different from profit which is calculated after all deductions, such as taxes, debts and expenses.
Calculating your income
Income, or operating income, is a measure of a company's total earnings or profit.
When investors and analysts speak of a company's income, they are usually actually referring to net income or the profit your company generates.
Net income is calculated by taking revenues and subtracting all the costs of doing business, such as depreciation, interest, taxes, and other expenses. The bottom line, or net income, therefore describes how efficient a company is with its spending and managing its operating costs.
In a monetary context, the term income almost always refers to the bottom line or net income, since it represents the total amount of earnings remaining after accounting for all expenses and additional income. Net income will appear on a company's income statement and is an important measure of the profitability of that company
Calculating in operational profits (sometimes known as continual profit, or earning before interest and taxes – EBIT) is slightly more involved.
Operating profit must be calculated by subtracting the running costs of the business from the revenue total.
Legitimate deductions include the cost of goods sold, rent, heating, marketing and advertising costs and payroll.
The basic formula is:
Operating income = Gross income – operating expenses – depreciation and amortization
Again, operating income does not include deductions for taxes, debts or loan interest payments.
In many cases, your accounting software will calculate all these values automatically as you record income and expenditure. But is is only by understanding the differences in the terms and how they are derived will you be able to deliver a fuller analysis of the monetary health of your business.
Bottom line growth and revenue growth can be achieved in various ways. A company might experience top-line growth due to a new product launch, a new service or a new advertising campaign that leads to increased sales. Bottom-line growth might have occurred from the increase in revenues that result form the increased sales, but they could also be generated by cutting manufacturing costs, administrative and staff expenses or finding a cheaper supplier.
Getting the solution you need
Boosting your revenues may often only be possible with investment in your business. Finance can help with re-equipment - letting you spread the cost of all kinds of business assets. It can provide for marketing or even for bringing in additional stock. But there are many types of finance, and getting the most appropriate type of finance for your needs is essential. At Rangewell, our team is ready to help you find the most appropriate kind of arrangement, the lenders who work in your sector and the most competitive deals.
To find out more about working with Rangewell to find better answers to your business funding needs - and to help you increase both your revenue and your profits, simply call us - our service is free.