Revenue vs. profit: what businesses need to know

If you’ve ever looked at your business’s strong sales and wondered where the money went by month end, you’ve met the gap between revenue and profit.

If you’re unsure about the difference between revenue and profit, you’re not alone – nearly two in five UK small business owners don’t know if they made a profit last month.

According to research from Xero, many British small businesses struggle with financial skills, and more than one in four (28%) business owners don’t think of themselves as ‘a numbers person’.

The good news is you don’t need to be an accountant to get to grips with revenue vs profit.

This guide explains the plain English definitions, how to calculate both, what affects them, and practical steps to improve profitability.

What is revenue?

Revenue is all the money your business brings in from selling products or services before deducting any costs.

For example, if you owned a florist business, your revenue could be earned by selling bouquets or providing floral event services.

You may see revenue being referred to as the ‘top line’ because it is typically the first number listed on an income statement.

Bear in mind that:

• ‘Gross’ revenue is all the money you earn from sales before any deductions, such as refunds, discounts, or taxes.
• ‘Net’ revenue is what’s left after taking those deductions away.
• ‘Total’ revenue is often used synonymously with gross revenue, but sometimes used to mean gross revenue plus other income (for example, interest, grants). Check your context and stay consistent in your own reporting.

If you run a subscription-based small business, you may want to consider other revenue metrics, including:

• ARR – annual recurring revenue provides a ‘big picture’ view of predictable, recurring revenue components in business contracts
• MRR – monthly recurring revenue is the total predicted monthly income generated by customers
• ARPA/ARPU – average revenue per account refers to the monthly or annual average income generated per active customer account, while average revenue per user/unit refers to the average payment subscribers make.

How revenue is recorded and tracked

You can keep track of your start-up’s revenue using accounting software, which often automatically pulls in numbers from your invoices, point of sales (POS) system, or online sales.

Most businesses review their revenue on a monthly or annual basis.

While generating revenue is essential for any business, focusing only on sales may not give you the complete picture of your business’s financial health.

Top-line growth could hide underlying financial issues and fragile customer demand.

That’s because revenue only shows how much you’ve sold and not whether those sales are helping your business stay healthy or generate value.

For example:

If your business generates £10,000 in sales per month but your costs to run the business – such as supplies, wages, and rent – total £9,000, you have £1,000 left after covering your expenses.

If your costs increase to £10,500, you lose money, even though your revenue hasn’t changed.

How do I calculate my revenue?

To calculate your business’s gross/total revenue, you could follow this formula:

Gross/total revenue = selling price x quantity sold.

For example, if you charge £10 for rings sold through your jewellery business and you sell 200 per month online or in-store, you would generate £2,000 in gross revenue each month.

The same formula could also be applied to a service-based business.

If you charge £35 per haircut and have 50 bookings per month, you would generate £1,750 in revenue.

Things that impact revenue

Several factors could impact your start-up’s revenue, including:

• customer demand and seasonality
• pricing strategy
• market competition, such as new entrants or promotions from rivals
• product range and availability
• sales channels and distribution
• economic conditions
• your start-up’s reputation and reviews.

If you have a clear understanding of your small business’s revenue, you may find it easier to manage cash flow and build forecasts, set budgets, market your business, and effectively price your products or services.

What is profit?

Profit is what remains after deducting expenses, such as taxes and operating costs, from your start-up’s revenue.

It is often referred to as the ‘bottom line’.

Unlike revenue, profit also includes the income your business gets from outside its main operations, such as interest or rent.

One example of this could be a fast food chain that generates revenue not only from serving burgers but also makes a profit on the rent and royalties collected from its franchise locations.

There are three distinct types of profit:

• gross profit – revenue minus the direct costs of producing your goods or delivering your services
• operating profit – gross profit minus running costs such as rent, wages, and marketing, but before interest and taxes. Also called EBIT (Earnings Before Interest and Taxes).
• net profit – your final profit after all costs are paid, including operating expenses, interest, and taxes.

Your profit margin is the percentage of your revenue that remains as profit after costs, whether at the gross, operating or net level.

Profit margins could be affected by customer demand and pricing.

Using high margins might be beneficial if your customers continue to buy from you, but excessively high prices to create higher margins could reduce sales and demand.

Read our guide to profit margins for small businesses.

How do I calculate profit?

To calculate profit on individual items, you could follow this formula:

Profit = selling price - cost price.

Imagine you run a sandwich shop, and your most popular sandwich sells for £4.50, but costs only £2.50 to make – you would generate a profit of £2 per sandwich sale.

If you wanted to calculate gross profit, you would follow this formula:

Gross profit = total revenue - cost of goods sold (COGS).

COGS includes direct costs, such as the ingredients for your sandwiches and the labour needed to make and sell them.

If you wanted to calculate your sandwich shop’s net profit, you would do so like this:

Net profit = total revenue - total expenses.

Your total expenses would include COGS, along with your operating expenses (such as rent, utilities, and staff wages) and taxes.

Why profit matters

Profit funds growth, cushions shocks, and signals sustainability.

A business can show high revenue but be unprofitable if costs exceed income – common during aggressive discounting, paid ad scale ups, or when overheads creep up unnoticed.

For a deeper dive into margins, see Start Up Loans’ guide to profit margins for small businesses.

Things that impact profit

Various factors that could positively or negatively impact your profits, including:

• operating costs such as rent, wages, energy, production
• customer demand
• market competition
• stakeholders and dividends
• business tax and compliance
• financing costs, such as interest on loans and late payment fees, lower net profit
• pricing and sales mix
• efficiency and productivity.

Learn more with our guide to profit and loss account explained.

Revenue vs profit - the key differences

Here are the key differences between revenue and profit at a glance:

Paying attention to both your revenue and profit could give you a better overview of your start-up’s financial health.

While revenue shows how much you’re selling, profit shows what you actually keep after costs.

Examining both numbers together can help you determine whether your business is truly growing healthily, or if rising costs are eroding your gains.

Knowing both figures could help you with:

• pricing – if your sales go up but profit doesn’t, you might be offering too many discounts or need to review your prices
• marketing – if your revenue grows but profit stays flat, your marketing costs might be too high for the sales they bring in
• products and services – some items might sell well but make very little profit, so it could help to focus more on the ones with higher margins
• cost control – if your profit improves even when sales are steady, it could mean you’re running your business more efficiently
• planning – revenue helps you see how much you’re selling, but profit tells you what’s available to reinvest or save for the future

Here is an example of how a hairstyling business may want to pay attention to both figures:

In a typical month, the business may generate £15,000 in revenue from service and product sales, but incur £9,000 in direct costs, such as stylists’ wages and product inventory.

This would leave the business with £6,000 in gross profit.

After spending £3,500 on operating expenses, including rent and utilities, their net profit would be £2,500.

It’s a good idea to regularly review your business plan and financial goals.

This helps you stay focused on what boosts sales and maintains a healthy profit.

By checking in often, you could spot problems early and adjust how you use your time or money.

This approach could help you grow your sales without letting costs spiral out of control.

Download our free business plan template.

Is turnover the same as revenue?

Bear in mind that ‘turnover’ and ‘revenue’ are used interchangeably to refer to the total sales from goods and services before any deductions.

However, the term ‘turnover’ is also used in other business contexts, such as staffing and stock.

How to improve profitability

Improving your start-up’s profitability could give the business a better chance of succeeding over the long term.

Here are five steps you might consider taking:

1. look for ways to cut costs by starting with your biggest expenses, such as suppliers or software, and focus on reducing waste rather than cutting essentials
2. increase sales without lowering your profits by promoting higher-margin products or encouraging customers to buy extras or return again
3. review your prices regularly – try small changes and make sure your prices cover your costs
4. focus on products or services that bring in the most profit, and consider dropping or changing those that don’t
5. track your revenue and profit each month with a simple spreadsheet or dashboard, so you can spot any issues early.

Things you might avoid doing to help you improve profitability include:

1. not tracking cash flow regularly
2. mistaking revenue for profit when planning growth
3. relying on sales from one place – your business could be affected if they suddenly increase their fees or change how they work
4. ignoring hidden/rising costs
5. failing to adjust prices when necessary.

Read our guide on how to reduce costs and increase profits.

Taking next steps

To help your start-up become stronger, consider tracking numbers and acting on them.

This could involve regularly reviewing your business plan or actively tracking your revenue and profit.

Creating a basic spreadsheet or signing up for accounting software could help you view both side by side.

If you need extra support, consulting an accountant for expert guidance could be helpful.

Find out how to give your start-up a financial health check.

Obtaining funding for your business can help you increase sales or run operations more efficiently.

For example, extra money might allow you to invest in marketing to reach more customers or buy better equipment to save time.

You might consider a government-backed Start Up Loan – learn more about Start Up Loans and how they work.