What’s the difference between revenue and income?
It’s easy to confuse revenue and income, and sometimes small business owners focus on “money coming in” as a catch-all. Maximizing sales means healthy income and healthy revenue, right? Well, not necessarily. It can be very important to differentiate revenue and income to fully understand the health of your small business.
So what’s the difference between revenue and income? Think of revenue as the top line (gross sales) and income as the bottom line (revenue minus costs, or profit).
Income and revenue can tell equally important stories about the financial health of your business, so let’s look at both more closely.
What is revenue?
Simply put, revenue is the money a business generates from sales and regular operations. It might be referred to as “gross sales” or a company’s “top-line.” Depending on the nature of the business, “sales” might not be the best way to describe revenue. For example, law firms, consultants, and other businesses may not measure sales.
Revenue is not the same as net income, which factors expenses into the equation. Revenue is only the money coming in.
Note: Revenue does not include loans, funding, and financing—only cash from business operations.
What is income?
Income, or “net income” is the total profit for a company over a period of time. Subtract expenses from gross revenue to calculate income.
Gross Revenue – Expenses = Net Income *before taxes*
Expenses might include payroll, operational costs, taxes, etc. While income isn’t synonymous with gross sales or revenue, there is a direct relationship. Income statements are key measures of a small business’s profitability.
Why it’s important to know the difference between revenue and income
There are a number of accounting reasons to differentiate, which we’ll cover below. But let’s start with the practical implications for your small business.
Revenue can be an excellent indicator of business performance because it measures the output of business operations. You may have heard the term, “top-line growth” which is in reference to an increase in revenue. Track your revenue growth as you reallocate spending. Investment in sales staff, marketing initiatives, and other operational expenses should be tied to revenue goals.
Income is the ultimate indicator of financial health because it accounts for everything the business is spending to increase revenue. Your primary business goal is to increase the bottom line. Ideally, your small business can find ways to increase revenue faster than it spends, leading to high income and profitability.
Improving your bottom line
The bottom line in your financial statement (the income line) shows the financial health and trends for your business. One of the best ways to address a negative trend is to re-evaluate business expenses. Poor vendor contracts, software licenses, unused office space, and other wasteful spending can offset revenue growth.
Overdue, or worse yet, unpaid invoices are a common income problem for small businesses. With more efficient income management—including proper invoicing and collections—you’ll turn that reported revenue into income for your bottom line.
Lending and funding opportunities
Every business should look for ways to drive more revenue, but it must be done at efficient operating costs to create opportunities for growth. Not only is profitability an immediate reward for a business, but it’s also a clear indicator of strong potential to lenders or investors.
Impressive revenue numbers may not mean much to investors if the business is burning through all of its cash to close deals. Even for startups that operate at a loss in the early stages, it’s important to keep moving the bottom line toward profitability. Increasing revenue helps, but only if it’s done efficiently. If you know your small business will seek lending or funding, focus on a positive income trend to secure the cash your business needs.
Accounting and tax implications
Your total revenue minus expenses provides your net income, before taxes. Of course, every business is taxed on income. So the final bottom line should account for income tax.
You may also have discrepancies between your reported revenue and your collections. In this case, your business might be eligible for tax write offs on unpaid invoices.
In any case, be sure to understand your requirements for federal, state, and local taxes. Keep up with documentation to avoid a messy audit. Once you subtract income taxes from your total income, you’ll have a final statement of net income.
