Published on Tuesday, September 24, 2019
Do you know the difference between income vs. revenue? Even if you’re a business owner or upper management, you might get these standard accounting terms confused. Many people do.
In the simplest terms, your company’s net income refers to its overall profitability. It sits as the bottom line, literally and figuratively, on your income statement. On the other hand, revenue refers to all the money a company brings in from its core activities. You’ll find it on the first line of an income statement. Businesses refer to this number as total revenue or gross revenue.
Individuals may call their total income before expenses and taxes “gross income” instead of taxable income. It’s important not to confuse gross income, used exclusively for individuals, with a company’s net income or gross revenue.
Let’s dive deeper into these financial accounting terms and explore the significant differences in income vs. revenue, some common examples of income vs. revenue, and some common revenue tracking problems businesses often encounter.
What is revenue? Your total revenue refers to the total amount of money your business generates from your core operations.
Accountants calculate revenue in a few different ways. It’s essential to understand what’s being included in total revenue.
Total revenue always includes money generated by a company’s core competencies, typically the sales of products or services. Calculating total revenue this way is easy. Just add your gross sales for a given period of time, without subtracting any business expenses. Gross revenue may also sometimes include:
- Income generated from financing
- Capital gains or capital income generated by the appreciation of assets
- Money from investments
- Income from the sale of assets and other business activities
You’ll find a company’s revenue on the top line of some financial statements, including a company’s income statement, sometimes called a profit and loss statement. When analyzing a profit and loss statement, it’s important to understand how those who created the spreadsheet calculated total revenue and what they included on the balance sheet.
Income, or net income, on the other hand, refers to a company’s profitability. Sometimes referred to as net earnings or net profit, you’ll find this number on your income statement’s bottom line and the first line of a cash flow statement.
To calculate net income, start with the company’s gross revenue. Make sure to be specific about what’s included in gross revenue. Does the spreadsheet reflect revenue from all sources, or only gross profit from the sale of goods or services?
Then, deduct your operating expenses, including:
- Raw materials
- Cost of goods sold (COGS)
- Administrative expenses
- Income taxes
The number left after you subtract these operating costs from your total revenue equals your net income.
However, the formula is not always so simple. Accountants use multiple methods to calculate operating income. Depending on how calculations are performed, net income may equal:
- Gross revenue minus direct costs minus indirect costs
- Gross profit minus operating expenses – depreciation – amortization
- Net sales + Interest expense + taxes
The final two formulas create totals referred to as “Earnings Before Interest & Taxes,” or EBIT, and “Earnings Before Interest, Taxes, Depreciation and Amortization,” (EBITDA).
Typically, income and expenses from interest don’t factor into operating income. Also, income taxes may be added back to net income totals. Reporting EBITDA as net income on financial statements may mask low profitability, although not always.
Examples of Revenue vs. Income
Since publicly held companies publish their profit and loss statements for shareholders, you can find many examples of revenue vs income for many leading corporations online.
Let’s use a fictional company as an example of a simple calculation for an income statement.
Let’s start with annual revenue of $750M. The cost of goods sold totaled $125M. Administrative expenses equaled $50M. Wages equaled $100M. Finally, the company reported amortizations and depreciation at $10M. The company showed a healthy profit margin or net income of $465M.
Common Revenue Tracking Problems
Tracking revenue and net income can provide a clear picture of a company’s financial health. But errors in reporting total sales and gross revenue often leads to poor decision-making. Let’s look at a few common revenue tracking problems that befall medium and large businesses.
- Inaccurate revenue figures derived from sales – If your CRM system doesn’t integrate with your accounting software, you might be using faulty data to calculate revenue. Everything from a typo to transposed digits could cause a faulty revenue analysis. Starting with inaccurate data won’t provide accurate predictions or a clear snapshot of where your company is today.
- Not recording revenue from all sources – It’s not just revenue from sales you need to track accurately. It’s crucial to be clear on the figures entered in your top line. Does your total revenue account for money from investments, the sale of assets, and other non-operating income? It’s okay if you don’t account for these figures in your total revenue, but you must be clear to those reading your financial statements or your net profits could look inflated or lower than expected.
Using an automated system to group revenue from disparate sources for easy review can help ensure you don’t miss any cash coming in.
- Not including total expenses – Have you entered all your operating expenses, including the cost of goods sold, salaries, and other overhead costs when calculating your operating profit? Some of these costs may be variable, so you may need to recalculate these figures frequently to maintain accurate net income figures.
- Inaccurate revenue recognition – Inaccurately reporting revenue during the wrong period of time can lead to discrepancies in your profit and loss statement. An automated system can ensure that revenue gets transferred to your balance sheet at the appropriate time, leading to more accurate net profit calculations and better business planning.
Use Revenue Tracking Software
revVana’s revenue tracking software can help automate revenue calculations from a variety of sources to eliminate human error, misreported revenue, and inaccurate financial statements. Accelerate top-line growth with accurate analytics and clear business insights. Contact us for a free demo now.