If you want your eCommerce business to succeed, you need to have an active understanding of its finances. You have to be specific about your financial goals and know what to measure to ensure that you’re on the right track.
In the world of business, you’ll often come across the terms “revenue” and “profit.” What do these words mean? Are they synonymous with “income”?
Below, we look into the main difference between revenue and profit. Then, we explain which of the two is more important in an eCommerce business.
What is revenue?
Revenue is the income that a company generates through its primary business activities or the sales of its products or services. When people talk about “sales” or “turnover,” they’re usually talking about revenue. Because you will find revenue at the top of any income statement, it is also known as the “top line.”
Revenue refers to a company’s income before expenses are deducted. For example, with a clothing retailer, revenue is the money it makes from selling clothes before any expenses—such as, the actual cost of the goods and expenses like marketing, rent, and payroll—are taken out.
What is profit?
In contrast, profit is the income that remains after you have deducted all operating costs, expenses, and debts. On an income statement, you may see both “gross profit” and “operating profit.” There’s also “net profit,” which is what businesspeople mean when they say “bottom line.”
Gross profit is what you get after deducting the “cost of goods sold” from the revenue (the top line). Cost of goods sold is the cost of producing the products sold by the company. This includes the cost of the materials, labour, freight, shipping, storage, and factory overhead, among other things.
Operating profit is the gross profit minus the “operating expense.” Operating expense is the ongoing cost of running the company. It includes things like rent, payroll, utilities, advertising, insurance, property taxes, supplies, legal fees, vehicle expenses, and travel expenses.
Why profit is the most important part of an eCommerce business
If you want to know how your eCommerce business is performing, you have to know which figures to look at. On its own, revenue is pointless. It doesn’t tell you much.
You may be raking in sales, but what about your bottom line? You can generate revenue but end up with a net loss. This usually happens when your expenses or debts outstrip your earnings.
What really matters, whether in an eCommerce or a brick-and-mortar business, is the profit. Profit is what you have left after breaking even.
As a business owner, you have to make more than what you’re spending to produce and deliver your goods. If you can’t do that, your business will cease to exist.
What you need to look at is not your revenue. It’s neither your gross profit or your operating profit. Your net profit or net income is the main indicator of how your eCommerce business is doing.
In a nutshell
Knowing the difference between revenue and profit is crucial to doing business. It also helps you devise strategies to grow your business and gives you a better feel for the market.
The process of keeping tabs on your bottom line is rewarding. Continue to do it as long as your business is functioning.