Revenue is the total income from business operations. So, If I sell a book for $100, that’s my revenue: $100. But does that really answer the question, “How much profit did I make?” Probably not.
When we ask ourselves how much we made, we’re usually looking for the profit. That is, the amount of money left over that we can take out of the business and use for ourselves. Revenue is the top line; profit is the bottom line. I might have made $5 on that book or $90. The revenue by itself doesn’t leave any clues.
The top line of our income statement is the revenue: the total of all sales and services generated by the business. But we must deduct the cost of sales. That’s the cost of goods sold (COGS); so, if I spent $5 on that book I sold, the COGS would be $5. When we subtract the COGS from the revenue, we get the Gross Profit. But that’s’ still not the answer we’re looking for. (Click here for more information on COGS)
We still must deduct the operating expenses, usually referred to as overhead. That amount includes all the office expenses, asset depreciation, and any other expenses not directly related to sales. Operating expenses are the expenses needed to operate as a business. After deducting these we get our profit. And that’s our money.
So how do I know how much I made on that one book? So glad you asked. We figure the profit margins. If my net profit margin for that month is 40% then I made $40 on that $100 book. (Click here to learn about profit margins.)
Have fun! And be nice to your bookkeeper!