Revenue vs Earnings: What Every Small Business Needs to Know

Revenue vs Earnings: What Every Small Business Needs to Know

Understanding your company’s balance sheet can be complicated as a small business owner. That’s because most of the terms on your company’s income statement might sound similar but mean something completely different. 

37% of small businesses in the US report that cash flow is a major obstacle to their success. Educating yourself about your company’s finances at the beginning can save you a lot of confusion down the road. 

Infographics Revenue Vs Earnings 1

In this article, we will demystify revenue vs earnings and the terminology surrounding it. We’ll take a look at what each of them means, their similarities and differences, and why they matter for your business. We’ll also take a look at some terms that are used interchangeably for revenue vs earnings and how to calculate them.

Let’s get started.

Revenue vs Earnings

“Revenue” is all of the money that comes into a company from the sale of goods before deducting expenses. Let’s say you’re a boutique owner. Your store’s revenue is all of your profits from apparel and accessory sales.

Your company’s revenue can be found on the top line of your income statement. This is also known as gross sales, net sales, gross revenue, sales revenue, and total sales.

Some refer to it as operating revenue; this is different from non-operating revenue – revenue that isn’t made from your primary business. Non-operating revenue can come from donations, lawsuit settlements, interest, investments, etc.

Now that we’ve covered what revenue means, let’s take a look at “earnings.” Your company’s earnings are what you make after deducting expenses like wages, income taxes, depreciation, rent, and loan interest. Earnings are also called the bottom line, net profit, operating income, or net income.

So, what’s the difference between revenue and earnings? An understanding of how each of them is calculated should help to clear that up.

How to Calculate Revenue and Earnings

Revenue tracks sales only. The metric is quantified pre-tax and expenses. Your company’s revenue depends on the cost of goods sold (COGS) as well as the size and number of sales. It’s the money you make before deductions.

Tracking earnings is a bit more complicated for business owners. Earnings measure the actual efficacy of your business operations because it shows what is left over after all your expenditures. The formula for earnings is:

Earnings = revenue – expenses

So, revenue is pre-deductions; earnings are post-deductions. Need more help? Here’s a great income statement tutorial on YouTube.

Infographics Revenue Vs Earnings 2

Revenue vs Earnings: Similarities and Differences

Revenue and earnings both refer to business profits. Sometimes the terms are (incorrectly) used interchangeably, making it easy to get confused.

Revenue is how much money goes into your business from customer purchases. Let’s say you own a perfume shop. Your revenue would be all of the money that goes into your business from perfume sales. So, your revenue shows you how well your products and marketing initiatives are doing.

Your earnings, on the other hand, would be what is left over after deducting the cost of bottles, rent, utilities, and paying your hourly employees. Earnings are what you can actually take out after expenses. They take your back-of-house operations and budgeting into account. Earnings are also a great barometer for where you need to refine your business strategy.

A Few Other Terms to Know

Unfortunately, earnings vs revenue aren’t the only financial terms you’ll need to decode upon reviewing your company’s income statement. To cut through the confusion and prevent mix-ups, we’ve provided a quick list of financial terminology below:

  • Profit margin: A percentage that expresses a company’s profits. The formula is: (revenue – COGS) / revenue x 100. This looks more complicated than it is, and this online calculator can simplify the process.
  • Outstanding shares: A fluctuating number that refers to the shares of stock being held by a company’s shareholders. It includes restricted shares owned by members of the company and those owned by investors.
  • Inflow: A significant amount of money transferred to a business.
  • Gross margin: A company’s net sales revenue – the cost of goods sold.
  • EPS (Earning Per Share): This shows the valuation of a company’s stock by dividing its net profit by the number of shares it has on the market.
  • EBITDA: This stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
  • Amortization: An accounting term that refers to paying off a debt or spreading out expenses over time. This often refers to installment payments, but it can also refer to the amortization of intangibles, which is more complex.
  • Operating profit: This is calculated as gross profit – operating expenses, but before subtracting interest and taxes.

These terms (and the extensive list of synonyms for earnings and revenue mentioned above) should give you a baseline for financial planning.

Understanding Earnings or Net Income

Let’s delve in a little deeper. Earnings are also called net earnings, gross income, and gross profit. Unlike revenue, earnings aren’t just based on the cash flow coming into your company. 

You may have impressive sales numbers. However, if the total amount of money going out is greater than the money coming in, your earnings will be insignificant.

Your operating expenses are key in determining your earnings. You may find that you need to determine ways to reduce expenses after your evaluation. Don’t be discouraged if this is the case.

By identifying where to consolidate and refine, you will create opportunities to increase earnings down the line, without the effort.

The Importance of Revenue vs Earnings

You may have an incredible product, great employees, and offer a competitive in-store experience. Your business might be generating impressive revenue. But if you don’t understand how to optimize your revenue vs earnings, you still may not see business profits.

Understanding your company’s financial statements definitely isn’t the most thrilling aspect of running a business. However, by doing so you will be able to identify opportunities to increase your earnings.

Improve Your Company’s Cash Flow

Costco Of Credit Card Processing

In summary, revenue vs earnings helps you uncover opportunities to refine your business and increase profitability. Reviewing your earnings on your company’s financial statements will help you zero in on the areas where you’re overspending.

You may discover that you need a more cost-effective shipping strategy or need to add a few more margin-builders to your inventory. Maybe you’re spending too much on packaging and can find a more environment-friendly solution. Or perhaps your credit card processing fees are eating away most of your profits so you might need to find an alternative.

Whatever the case, reviewing your expenditures will enable you to optimize your business strategy for improved earnings over a period of time. Soon, you’ll start seeing profits from all of your hard work and take your business to the next level.

With a wholesale credit card processor like Payment Depot, you need to pay only a flat monthly fee. It saves you from overspending on card fees so you can increase your earnings and make more profits. To learn how Payment Depot can help you save up to $800 every month in credit card fees, contact our team today.

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