A company's revenue is the total amount of money it receives from sales over a set time period. Income is how much of that revenue is left after you deduct the business's expenses. Subtract income from revenue and you'll get the company's cost of doing business over the time period measured.
Business owners need to understand the difference between net income and revenue (and measure both) because it helps them understand their expenses, including inventory costs, overhead and other outlays. It's also important because businesses are valued differently using one number versus the other, and because only net income is taxable.
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What is revenue?
Revenue is the gross amount of money a business earns over a specified time period. The number is often noted as total sales or some other figure indicating the total amount the company brought in. Businesses generate this money from many different avenues, but the figure does not include any company loans taken during the covered period.
The best accounting software packages make it easy to measure and track a business's revenue. With just a few clicks, owners can generate a report to see the business's top-line revenue over a chosen period, often with a breakdown of how much each line of business contributed to the total revenue.
What is income?
Income is the number reflected at the bottom of a cash flow statement. It represents the amount left over after a business accounts for revenue and expenses over the same period (i.e., all the money flowing into and out of the company). Income could be negative if a company's expenses exceeded its revenue during the period in question. In that case, the company has operated at a loss.
Measuring a business's net income starts with looking at its revenue – how much money the company brought in over a set time period. Then the company makes adjustments for all expenses incurred over the same period. Those expenses could include the following:
- Cost of goods sold
- Labor costs
- Rent and utilities
- Fixed overhead
- Marketing costs
- Legal fees
- Office expenses
- Salaries for office personnel
- Employee benefit costs
- Taxes
- Business licensing fees
- Software subscription fees
While these are ordinary small business expenses, they don't all apply to all companies. Applicable expenses for your business depend on its size, your company type, the industry you operate in, and your specific accounting practices.
Examples of income vs. revenue
Different businesses use different measurements for both revenue and net income. Each figure includes varying factors and has a different level of relevance for a particular company based on its industry and how it operates.
Gross revenue is much more straightforward than net income. It's the total amount of money that a business takes in over a specific time period. Here are some examples of gross revenue:
- Total sales (this can be all goods sold in a quarter)
- Total billable hours for an attorney or consultant
- Gross licensing fees received
- Total commissions received
Net income – the amount of money a company made or lost over a period of time after you offset expenses against revenue – is provided separately on accounting statements. It may appear on financial statements as any of the following:
- Net operating revenue
- Net income
- Taxable income
- Earnings before interest and taxes (EBIT)
- Earnings before interest, taxes, depreciation and amortization (EBITDA)
Like revenue, a company's net income is also easy to calculate using small business accounting software, but it's more involved. A manager needs to generate a report that includes revenue and expenses, particularly those relevant to its specific operations. (Report generation is a typical accounting software feature.)
Once a manager produces a report reflecting some measure of net income (usually a profit and loss statement, or P&L), they still need to know which metric to use and how to use it. That's one of the challenges of business accounting: Software can provide a lot of information, but it doesn't tell business owners how to use these insights.
Importance of revenue vs. income in accounting
While a business's net income includes more information about the overall state of its finances, both revenue and income are essential for small business owners to know, measure and track. These metrics are used for different things, but here are some of the common uses for both revenue and income:
- Valuing a business
- Raising capital
- Getting a business loan
- Calculating profit margin
- Making important operational decisions
Both revenue and income are provided regularly in company financial reports to shareholders. Depending on a business's type and size, these figures may also be included in reports filed with regulators such as the U.S. Securities and Exchange Commission.
Revenue and income are also prominent fixtures in tax forms filed with the IRS, as well as in company strategies for minimizing tax liability incurred from year to year.