There are two accounting words that business owners misuse all the time. Not knowing the difference between them can cost them their business.
The words are revenue and profit. I’m going to help you understand revenue vs profit and what they each mean. And why it’s so crucial to your business.
Revenue is the money you earn in your business. When you sell a product, service, or make money from affiliate sales, this is revenue. The number of courses sold times the price of the course.
Revenue makes up the top line of the income statement. But it doesn't tell the whole story.
Did you know that if you discount a product with a coupon code, this reduces your revenue? Yep. It’s called an expense to income or a deduction of your revenue.
Using a coupon, which reduces your revenue, is different from the fees incurred from PayPal and Stripe, which also lowers your income.
Fees from PayPal and Stripe are expenses and should be categorized to an expense bucket. The fees are the cost of doing business through these service providers. These fees do not come off of your revenue.
Profit is the amount of money your business has made after your expenses are deducted. This does not take into account taxes! You should save roughly 30% of your profit for taxes.
Taxes will reduce your profit because they are an expense.
I hear many entrepreneurs talk about the money earned from a launch. It’s inspiring to hear about $10k, $50k, $100k, or more launches.
While having a $100k launch may bring in significant revenue, it may net you a much smaller profit. The factors all depend on your business and the amount of money you spent on your launch.
So hearing about a $100k launch does not tell you the real story.
The real story is this. Having a $100k launch may net you a hefty profit or a much smaller profit. It depends. Behind most large launches are many expenses:
Remember this formula:
REVENUE - EXPENSES = PROFIT
It’s great to talk about your revenue. But you don’t want to be revenue rich and profit poor. If your expenses exceed your income, then you are profit poor. You have no profit.
Revenue and profit are not interchangeable words! Don’t be fooled by thinking you can use one for the other.
Remember, when you are talking about revenue, this is your income, how much you earned. Profit is what you have leftover after you subtract all your expenses.
Understanding the difference between the two can help you make better decisions in your business. Don’t get caught in the trap of thinking revenue is all that matters.
What matters is the bottom line: Profit.
Keeping your business profitable will keep you in business.