Definition
Revenue and income, in finance, are two distinct concepts. Revenue refers to the total amount generated from selling goods or services before any costs or expenses are subtracted. On the other hand, income, also known as net income or profit, is the amount left over after all costs, expenses, taxes and other obligations have been subtracted from the revenue.
Key Takeaways
- Revenue refers to the total amount of money a company generates from its business activities before any expenses are subtracted. It’s often called the “top line” because it’s typically the first line item on a company’s income statement.
- Income, specifically net income, is a company’s total revenue minus all expenses, including cost of goods sold, operating expenses, interest, taxes, and more. It’s often referred to as the “bottom line” and provides a measure of profitability.
- Understanding the difference between revenue and income helps to provide a more comprehensive view of a company’s financial health. While a company may generate high revenue, high expenses could result in low or even negative net income. Thus, both metrics are crucial to consider when evaluating a company’s performance.
Importance
Revenue vs Income is an important financial term because it provides a clear understanding of a company’s financial health. Revenue refers to the total money earned by a company from its business activities, such as sale of goods or services, before any expenses are deducted.
On the other hand, income, often referred to as net income or profit, is the money left after all costs, taxes, and expenses are subtracted from the total revenue. This distinction is vital as it allows for better decision-making and strategic planning.
Companies can have high revenues, but if expenses are not well-managed, the income may be low. Hence, for a comprehensive financial evaluation, both revenue and income must be considered.
Explanation
Revenue and income are key financial terms that are often misunderstood, but they serve vital roles in assessing a company’s financial health and making strategic business decisions. In essence, the purpose of revenue is to show the overall amount that a company earns from its business activities, primarily from the sale of goods and services, before any costs or expenses are deducted. It is used to evaluate the total gross earnings a company generates and is often referred to as the “top line” on an income statement.
Revenue serves as the starting point from which companies can calculate their gross profit, and it can also serve as an indicator of market demand for a company’s offerings. Conversely, income or net income represents the amount of money that remains after all the costs, expenses, taxes and other business obligations have been paid from the gross revenue. The purpose of this term is to provide a clearer picture of a company’s profitability, i.e., how efficient the company is at turning its revenue into net earnings.
It is commonly referred to as the “bottom line” on an income statement. The use of income usually involves financial analysis for performance, trend analysis, forecasting, and making decisions about investing in or lending to a company. Despite being smaller than revenue, this figure is significant because it is the final measure of a business’s profitability after all deductions and it’s what the shareholders ultimately care about.
Examples of Revenue vs Income
Apple Inc.: In 2020, Apple’s total revenue was $5 billion, which represents the total amount of money the company generated from its various businesses, such as selling iPhones, iPads, Macs, services etc. However, after accounting for the cost of producing those goods, employee salaries, operational costs, taxes and other expenses, their net income was $
41 billion. Revenue is the total amount of money earned, whereas income is what remains after all expenses are deducted.Walmart Inc.: For the fiscal year ended January 2021, Walmart reported a total revenue of $
15 billion. This is the amount the company raised from its retail stores, e-commerce site and other services. After accounting for costs: the cost of goods sold, operating expenses, interest, taxes etc., the company’s net income stood at $51 billion.
Microsoft Inc.: For fiscal year 2020, Microsoft generated a total revenue of $143 billion from their varied businesses, such as selling software, cloud services, consulting services, etc. However, their net income, which is calculated after deducting all sorts of costs, like the cost for software development, employee salaries, administrative expenses, taxes etc., was $28 billion. It shows that even though their top line (revenue) was high, at the bottom line (income), the figure was significantly lower due to costs involved in the business operation.
FAQs: Revenue vs Income
What is Revenue?
Revenue is the total amount of money that a business receives from its operations, such as sales of goods and services. It does not take into account any deductions such as costs and expenses.
What is Income?
Income is the net earnings of a business after all expenses and costs are subtracted from total revenue. It represents the residual earnings available to shareholders.
What is the difference between Revenue and Income?
The main difference between revenue and income is what they take into account. While revenue only considers the total income from sales, income takes into account total revenue minus all operating expenses, costs, taxes, and interest payments.
Why is it important to understand the difference between Revenue and Income?
Understanding the difference between revenue and income is crucial for businesses because it provides insight into the profitability of the business. While a business can generate high revenue, it does not necessarily mean it’s profitable. If the costs to produce the goods or services are high, the income may be low. On the other hand, a business with low revenue but lower costs and expenses could have higher income or profit.
Can a company have high Revenue but low Income?
Yes, this situation can occur when a company has high costs and expenses relative to its revenue. This could be the case for a company in a high-growth phase that has high costs for research and development or for a company operating in a highly competitive market with thin profit margins.
Can a company have high Income but low Revenue?
Yes, a company could have high income but lower revenue if it effectively manages its costs and expenses. This often happens in industries with high profit margins, or for companies that have a competitive edge, such as unique technology or strong branding.
Related Entrepreneurship Terms
- Gross Revenue
- Net Income
- Operating Income
- Profit Margin
- Earnings Before Interest and Taxes (EBIT)
Sources for More Information
- Investopedia – A comprehensive resource for learning about all things finance and investing, including the difference between revenue and income.
- The Balance – A personal finance website that covers many topics, including a detailed overview of revenue versus income.
- Accounting Coach – This website offers a wealth of information about accounting concepts, including the difference between revenue and income.
- Corporate Finance Institute – They offer a range of in-depth resources on finance topics, including a guide to understanding the key differences between revenue and income.
