Even as an early-stage startup, knowing and understanding your finances from day one is crucial. Lack of understanding around basic principles can lead to mismanaged or disorganized finances, which ultimately lead to more serious problems as your company grows.
Two of the most basic things to understand about your business are your revenue vs income, which are commonly confused as being one and the same. That’s not the case.
Keep reading for a rundown of what revenue and income are and how they differ.
What Is Revenue?
Revenue is the total amount of money coming into a business. On a company's income statement, the revenue appears on the top line.
Revenue is a good indicator of how well a company is doing but doesn't determine the overall profits. While there is money coming into a business, there is generally always money going out.
All companies have expenses, and these can vary greatly depending on the nature of the business. Revenue doesn't take expenses into account, so while it shows how much money is coming in, it doesn't provide an accurate value for your company.
What Is Income?
So what's the difference between revenue and income? Income is the total amount of money coming in after accounting for deductions. These expenses or deductions could include:
- Operating Expenses
Net income (also known as the bottom line) indicates company efficiency in terms of its operating costs and overall spending. The term "income" almost always refers to the net income which appears on a company's income statement. It's one of the best ways to measure company profitability.
Revenue vs Income
Since both revenue and income relate to cash flowing into the business, many people use the two terms interchangeably. What many people don't realize is that income is calculated with expenses while revenue is not.
However, revenue and income work together.
A company that is doing well will typically have high revenue and a well-balanced income. This means that the company makes strong sales while keeping operating costs relatively low. The products or services a company sells and its costs determine the ideal gross profit margin.
One of the most common mistakes that new startups make is focusing only on increasing sales without thinking about costs. High revenue is a good thing, but it's important to keep track of expenses, as they can quickly add up.
If you take a look at your company's gross revenue vs gross income and find that expenses are higher than they should be, this is something you will want to address. It doesn't matter how good your team is at selling or how much money you are bringing in. If you poorly manage your expenses, it will be hard to catch up as more time passes.
Different types of businesses work out gross revenue vs income differently using a range of factors depending on the industry.
Some typical examples of gross revenue include:
- Overall sales (goods sold within a given period)
- Total billable hours for a consultant
- Licensing fees
Income appears separately on a financial statement and can include any of the following:
- Taxable income
- Net operating value
- Total EBIT (Earnings before interest and taxes)
- Total EBITDA (Earnings before interest, taxes, depreciation, and amortization)
The net income is more useful when trying to work out the overall financial state of a business. With that said, it's still necessary to keep track of revenue, especially for startups.
Common Uses of Revenue and Income
One of the main reasons a business needs to track both revenue and income is because they both have important uses in terms of business operations.
They can help you value your business, which you might want to do for various reasons:
- Attracting investors
- Selling stocks
- Obtaining a bank loan
- Understanding and analyzing business growth
- Positioning for an acquisition
If you want to raise capital to grow your business, you need to know your net income. The larger your profits are, the easier it will be to raise the necessary capital.
You also need to know your income if you simply want to calculate a profit margin. The more information you have on these factors, the easier it is to make operational decisions.
Any financial reports provided to shareholders should contain both revenue and income. On top of this, they're both essential for any tax forms required by the IRS.
How Zeni Can Help Manage Your Finances
Revenue, income, and other financial elements of a business can often be confusing and difficult to manage. Comparing revenue vs income and understanding the differences is one thing, but overall financial management of a business is another.
Zeni provides a range of intelligent bookkeeping, accounting, and CFO services that can help your business operate. With the assistance of AI, we provide you with insights into your business's finances in real-time through the Zeni Dashboard, showing information such as revenue by product, operating expenses, month-end reports, and more. Having our team handle your finance functions lets you relax knowing that everything is being taken care of accurately and efficiently.