Cash flow isn’t black and white. To know how your business is doing, you have to look at the whole picture, including revenue and expenses.

Revenue is the total amount of money that comes from selling products or services. Net income is the profit after subtracting all expenses and costs from revenue. Both figures measure money coming into the business. But the difference lies in what they reveal about your profitability.

Here’s a guide to revenue versus net income and how they differ. 

What Is Revenue?

Revenue is the total amount of money you bring in from selling your products or services. This top-line figure sits at the beginning of your income statement. 

So, what is revenue in business? Think of it as the starting point for understanding your financial performance. It tells you how much sales income you’re generating. The higher your revenue, the more profitability potential you have. 

Tracking revenue over time reveals important trends in your business. Are sales increasing or decreasing? Which products or services are most popular? Answering these questions helps you decide where to focus your efforts.

What Is Income?

Income reveals how much revenue you get to keep. Net income, or profit, is the amount left after you subtract all expenses and costs from your revenue. 

To calculate net income, start with your total revenue and subtract the following:

• Cost of goods sold (COGS). This includes expenses like the raw materials and labor you need to produce your products or services.
• Operating expenses. These are the costs of running your business. This includes rent, utilities, and employee wages.
• Taxes. Your income tax liability is based on your taxable income. You can calculate taxable income by subtracting deductible expenses from your revenue.
• Interest. If you have any business loans or debt, you’ll need to pay interest on those balances.

What’s left after these deductions is your net income or bottom line. This figure represents your business’s overall profitability. It tells you how much money you actually make.

By tracking your net income over time, you can identify trends. This lets you make data-driven decisions to improve your business and make more money. You might find ways to boost income, reduce costs, or optimize your product.

It’s important to note the difference between gross income and net income. Gross income is your revenue minus COGS. Calculate it before deducting operating expenses, taxes, and interest. 

Gross income is helpful for understanding your profit potential. But net income provides a more accurate picture of your current finances.

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Revenue Versus Income: Understanding the Key Differences

Here are the main differences between revenue and net income:

1. Different Locations on the Income Statement

Revenue and income show up in different places on your income statement. Revenue is always at the top, while net income is at the bottom after all deductions. This means you find income by subtracting expenses from revenue.

2. Scope of Financial Insight

Revenue only tells part of your financial story. It doesn’t account for the costs that come with making money. But income factors into all expenses. This gives you a more comprehensive view of your profitability.

3. Potential for Different Trends

Revenue and income can move in opposite directions. Your revenue might increase from one period to the next. But if your expenses grow faster, your net income will decrease. This is why focusing only on revenue growth can be misleading.

4. Importance for Financial Sustainability

Net income is more important than revenue when it comes to financial sustainability. Generating high revenue is a positive sign. But net income shows if your business is profitable and sustainable.

5. Distinct Roles in Decision-Making

Revenue and income affect business decisions in different ways. Revenue helps you set sales targets and forecast growth. It’s also useful for comparing your performance to competitors. But income is the key metric for making strategic choices about financial management. It’s better for specific decisions, like how much you can afford to pay staff.

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Illustrating the Difference Between Net Income and Revenue

Let’s look at a simple example to show the difference between revenue and net income.

Imagine you run a small bakery. Last month, you sold 1,000 cupcakes at $3 each, generating a total revenue of $3,000. However, to make those cupcakes, you had the following expenses:

• Ingredients (flour, sugar, etc.): $500
• Packaging materials: $100
• Rent and utilities for the bakery space: $800
• Employee wages: $1,000

To calculate net income, subtract these expenses from your revenue:

$3,000 (revenue) – $500 (ingredients) – $100 (packaging) – $800 (rent and utilities) – $1,000 (wages) = $600 (net income)

In this example, your bakery generated $3,000 in revenue, meaning your total expenses were $2,400 and your net income was $600. This shows how expenses can significantly impact your bottom line, even when you have strong sales.

Now, let’s consider another scenario. Imagine your bakery expands and starts selling custom cakes for special occasions. In the next month, you sell 500 cupcakes at $3 each and 16 custom cakes at $100 each, resulting in a total revenue of $3,100. But the cake ingredients are more expensive.

Your expenses for this month are:

• Ingredients: $1,100
• Packaging materials: $50
• Rent and utilities: $800
• Employee wages: $800

Calculate your net income for this month like this:

$3,100 (revenue) – $1,100 (ingredients) – $50 (packaging) – $800 (rent and utilities) – $800 (wages) = $350 (net income)

Even though your total revenue was higher than the previous month, your net income was only $350. This is due to the higher cost of ingredients and lower number of cupcake sales.

These examples show how focusing on revenue alone can mislead you. Learn the relationship between expenses and revenue. You’ll make more informed decisions about pricing, costs, and growth.

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Why Understanding Revenue Versus Income Matters

Knowing how revenue and income work can help you:

• See financial health. By looking at both revenue and income, you get a clearer picture of how well your company is performing.
• Make better pricing decisions. Understanding the relationship between revenue and expenses helps you decide if you need to raise prices or reduce costs.
• Spot trends. Tracking revenue and income helps you identify trends. This empowers you to address issues before they become bigger problems.
• Get funding and investments. Potential investors or lenders want to see both your revenue and income. These numbers give them more visibility into your finances.
• Set realistic financial goals. Understanding where your money comes and goes helps you create a realistic roadmap for success.

5 Pro Tips for Increasing Net Income

Understanding the difference between revenue and income is only the first step to improving your finances. The ultimate goal is to increase your net income, which gives you more resources to help your company grow. Here are some pro tips:

1. Cut down on operating expenses. Review your operating expenses often. Look for areas where you can cut back, like office supplies and travel costs.
2. Boost sales revenue. Market heavily or expand your product or service offerings to increase sales.
3. Negotiate with suppliers. Work with your suppliers to get better deals on the products and services you need to run your business. Seek out discounts and bulk purchasing options. Look into other suppliers who can offer better prices.
4. Reduce waste. Identify areas where you might be wasting resources, like spending time on tasks that could be automated. Develop strategies to reduce waste and improve efficiency.
5. Cut labor costs. Streamline your staffing and cross-train employees. Consider using technology to automate tasks and reduce the need for manual labor.

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Track Business Expenses With Invoice Simple

Tracking expenses has never been easier. Invoice Simple‘s business expense and receipt tracker lets you scan any receipt and automatically capture key info. All your expense data is ready to export into a summary report when you need it.