Welcome to Module 7 which will cover everything you need to know about revenue and profit! If you are just joining us, we recommend you start by completing Module 1: How to Write an Application 101, Module 2: Value Proposition, Module 3: Customers, Module 4: Target Market & Market Size, Module 5: Business Model and Module 6: Goal Setting.

Overview

As a business owner, revenue and profit are both very strong indicators of your company’s financial status. While these numbers are interrelated, they are two separate, distinctive measures of your business’s health and growth. However, people often mistakenly use them interchangeably. It is important to understand the difference between revenue and profit in order to speak knowledgeably about your business and to know which levers you can pull to increase your business’s bottom line.

What Is revenue? Revenue is the money generated from your normal business operations. Simply put, revenue is the money earned by a company obtained primarily from the sale of its products or services to its customers during a certain period. 

• Why is revenue important? Revenue is a vital part of your business because your business needs revenue to survive. Beyond being a lifeline, revenue can provide key insights into your business, as it is the greatest factor that determines business performance. It tells you how much money your business earns from the sale of its products/services.

• How does a business generate revenue? There are several ways a business can generate revenue. These may include: 

• Income from products sold - for instance, you earn revenue from a dress or bag of rice you sold 

• Subscription fees paid by subscribers for magazines or digital content/services 

• Fees earned for delivering professional services, such as services provided by lawyers, accountants, or consultants

• How do I calculate revenue? To calculate revenue, you multiply the quantity of products/services sold by the price per product/service.

• Revenue = Number of units sold * Selling price per unit

• For company providing services, this is the number of service hours (or the price you charge for a service package) multiplied by the billable service rate

• For a company selling products, this is the number of goods sold multiplied by the sales price

Unless you run a non-for-profit or an NGO, your business should be profitable. The ability to earn a profit after paying expenses is a key function of every business. Earning a profit is a sign that your business is healthy and successful and can continue to grow.

• What is profit? Profit describes the financial benefit realized when revenue generated from a business activity exceeds the expenses, costs, and taxes involved in sustaining the business. Simply put, profit is the difference between the amount you earned and the amount you spent in buying, operating, or producing something.

• Why is profit important? Profit is essential for the survival and growth of a business. Profit enables your business to grow by providing additional funds to reinvest in the business, helps employee motivation (the more profit you earn the more you are likely to give your employees raises), attracts investors, etc. Businesses are subject to many risks and uncertainties - for example, increasing competition, changing government policies, inflation etc. When such risks/uncertainties arise, profit can be used to address those unfavourable business challenges. For those reasons, the success of your business can be judged by the extent of profit earning capacity. 

• How do I calculate profit? Profit is calculated as total revenue less total expenses.

• Profit = Total revenue - total expenses

Revenue vs. Profit 

The key difference between revenue and profit is that revenue refers to the income generated by your business either from selling its goods or by providing its services in a particular period, whereas profit refers to the amount realized by your business after deducting all its expenses from the total amount of revenue. Revenue does not take into consideration the costs associated with creating, providing, and selling your product/service, so your revenue will always be a higher number than your profit.

Profit cannot exist if there’s no revenue. If you want to increase your profits, you need to increase your revenue or decrease your expenses.

• To increase your revenue: 

• Increase the prices of your products or services. Assuming you maintain the same number of sales, your revenue will increase from the price increase. Proceed with caution here, as some customers might take their money elsewhere if you cannot provide a good reason for increasing your prices.

• Increase the number of new customers you serve. You might need to increase your marketing efforts or expand your target market in order to reach a new audience.

• Increase customer frequency. When customers purchase more often, you will have a larger and more consistent influx of revenue. Special promotions and sales can encourage more frequent purchases.

• Consider developing new product/service lines or selling in new markets. This has the potential to both increase the number of customers and the frequency of customer purchases.

• To decrease your expenses:

• Negotiate with your suppliers. Can you negotiate better terms with your suppliers, or do you need to change suppliers? It is helpful to review your supplier base regularly and see if you can buy the same raw materials cheaply or more efficiently. However, try to ensure that you maintain quality at the same time.

• Consider your working premises. Do you have a rented space? Have you examined whether you are getting the most out of your space, and do you even need a physical space? Switching to a remote working environment or co-working space could save on expenses.

• Review your production. Look for avenues to eliminate waste and lower the costs of your materials. How can you streamline your production processes to ensure you minimize resources, including extra labor cost?

• Avoid unnecessary expenses. What unwanted services are you paying for? For example, do you have any office equipment, unnecessary logistics, entertainment, or non-essential subscriptions that you could get rid of? While these costs may seem small on their own, they continue to pile on as unnecessary expenses over time.

Without generating sufficient revenue, your business can’t make profit. As a business owner, your objective should always be to maximize both your revenue and profits in order to demonstrate financial health, growth and sustainability.

AWEC is an experiential, applied learning program, which means we promote business growth by having fellows immediately apply what they learn to their own business. We have created the following tools to help you apply the knowledge from this module to your business. We encourage you to download the tools below to strengthen your application AND your business!

Well done to you for completing your seventh module. You can now move on to Module 8: Capital.