Revenue vs. income: What's the difference?

If you’re in business, you know there are dozens of accounting formulas and terms that relate to the financial health of your small business. At first, it can be a bit overwhelming. Fortunately, you don’t have to be a CPA to get a handle on the basics, but getting to know some key terms is extremely helpful—and there’s a lot you can do on your own with accounting software. 

Two of the most common and valuable terms you’ll come across in managing your day-to-day business finances are revenue and net income. Both figures appear on the profit and loss (P&L) statement, but net income accounts for company expenses, while revenue does not.

Understanding the difference between net income and revenue is crucial for business owners and investors, as they:

• Help business owners make decisions about investments
• Identify areas for optimization
• Allow investors and creditors to assess the company’s profitability

For example, if a company's revenue is increasing, but its net income is decreasing, this could be a sign that the company is spending too much money on expenses. This information helps you make decisions about how to cut costs and improve the company's profitability. Let’s explore other key differences, how to calculate each, and when to use them: 

What is net income?

Net income is the money your company makes after accounting for all expenses. The formula for net income is revenue minus expenses. Your expenses include everything your business spends money on, such as:

• Raw materials 
• Rent
• Utilities
• Marketing 
• Travel and entertainment
• Insurance
• Depreciation 
• Legal fees 
• Interest 
• Taxes 

Net income, also known as net profit, is the same thing as your bottom line. This is because it appears as the final item (or bottom line) on your company’s income statement.

What is revenue?

Revenue is the money you make from sales of goods and services. For example, let’s say your company sells 100 items for $100 each. That would make your revenue $10,000. But note that you can also have revenue from other sources, although it’s less common, such as income from renting out part of your retail space. 

Say you lease out part of your store to another business. If the rent revenue for that is $500, you can add this to your total revenue to get $10,500. Other sources of revenue may include any dividends or interest from investments your company holds.

COGS are all the costs it takes to make a product or service. So gross profit accounts for direct costs to make a product, while net profit accounts for any and all business expenses. 

Notable differences between income and revenue

The top line of your income statement is revenue or sales. The bottom line is your net income. Both revenue and net income are also key metrics you’ll include in reports to banks or investors when seeking money for expansion, additional materials, or new equipment. 

Your revenue provides insight into the scale of your business. With expenses, two companies can have the same net income but very different revenue. For example, a business with $1,000 in monthly revenue operates on a much smaller scale than one with $100,000. 

Net income shows how well a company is turning sales into profits. If the two examples above have the same income for the month, it’s likely that the much larger company is struggling with profitability. 

If more money went out of your business than came in, your company will see a net loss. However, if more money came in than went out, your company will see a net profit. 

It’s important to remember that profit and cash flow are different. A company can appear profitable but have negative cash flow, and vice versa.  

Example of net income vs. revenue

Let's consider a clothing retailer, Trendy Threads, which sells a variety of clothing items, including shirts, pants, and dresses. In a given year, the company manages to sell 10,000 items at an average sales price of $100. Its revenue for the year is:

• Total items x average sales price = revenue 
• 10,000 x $100 = $1,000,000 

This means that customers have spent a total of $1 million purchasing Trendy Threads' clothing. However, when we look at the company's expenses, we find that it incurred costs such as purchasing raw materials for making the clothing, paying employees, covering rent for its retail stores, and spending money on digital marketing campaigns. These expenses were $900,000 for the year.

To calculate the net income of Trendy Threads, we subtract expenses from ‌revenue. So, in this case, ‌net income would be:

• Revenue - expenses = net income 
• $1,000,000 - $900,000 = $100,000

This means that after deducting the expenses of running the business, Trendy Threads has a net income of $100,000.

So, although Trendy Threads made $1 million in revenue, it does not mean that it made $1 million in profit. The net income of $100,000 shows ‌the company’s actual earnings after all the expenses.

To increase its net income, Trendy Threads can evaluate its costs and expenses to improve its profitability. Or it might be able to increase net income by boosting revenue with more marketing.

Streamline your accounting and save time 

Your business relies heavily on both the sales you bring in, as well as the income you keep after all expenses. Maintaining strong revenue growth and robust profitability are sound business strategies. Meaning, it’s always a good idea to track trends in revenue and expenses. 

If you notice several years of declining revenue, it may be a sign that your company is struggling. When using accounting software like QuickBooks Online, you can easily generate your company’s income statement and see how net income and net revenue affect your bottom line.