KEY TAKEAWAYS
- Revenue is total money from core business activities before expenses are deducted.
- Income, or net income, is earnings remaining after all expenses are deducted from revenue.
- Revenue highlights sales effectiveness. Income shows overall financial health post-expenses.
- Companies assess revenue from sources like product sales, rentals, and licensing agreements.
- Income is more crucial than revenue as it indicates profitability and operational efficiency.
Revenue vs. Income: An Overview
Revenue is the total amount of money generated from a business's primary operations. It's also referred to as gross sales or "the top line" because it's the first line on an income statement. It's calculated by multiplying a company's average sales price by the number of units sold.
Income is a company's total earnings after all expenses and earnings that aren't counted as revenue are deducted. It's calculated by subtracting expenses, interest, cost of sales or goods sold, and taxes from total revenues. It's often referred to as "net income."
Both revenue and income contribute to a company's financial health and performance. They're used to assess the financial efficiency and profitability of a business.
Understanding Revenue: The Top Line Approach
Revenue is the money a company generates before any expenses are subtracted. It only indicates how effective a company is at generating sales. It doesn't consider operating efficiencies which could have a dramatic impact on the bottom line.
Revenue can come from a variety of sources. These include but aren't limited to:
- The sale of goods, services, and assets
- Advertising
- Licensing agreements
- Fees and service charges
- Subscriptions
- Rental income
Companies recognize and record revenue differently so it isn't always the same even for companies within the same industry. You can find out how a specific company defines it in its financial statements if you're unsure.
Analyzing Income: Net Earnings Explained
Income is earnings left after all expenses and non-revenue, additional income are deducted. It's more commonly called net income because it's the net result after the deductions. There may be several line items subtracted from revenue to arrive at net income.
Income can be broken up into different categories just like revenue:
- Gross Income: Gross income is the total income recorded before any taxes and expenses are deducted. Gross income may also be referred to as gross profit or gross margin. It's found on the income statement.
- Net Income: Net income is calculated by subtracting the costs of doing business such as depreciation, interest, taxes, and other expenses from revenues. The bottom line or net income describes how efficient a company is with its spending and managing its operating costs. This figure appears on a company's income statement and is an important measure of its profitability.
Income can be used to analyze and determine whether a company is operating efficiently.
IMPORTANT
Common financial ratios that use data from the income statement include profit margin, operating margin, earnings per share (EPS), price-to-earnings ratio, and return on stockholders' equity.
Comparing Revenue and Income: A Case Study with Apple
Consider Apple, one of the largest tech companies on the market, to grasp how significant the difference between revenue and income can be. From a net sales (total revenue) of $119.5 billion in Q4 of 2023, Apple deducted its:
- Total cost of sales: $64.7 billion
- Total operating expenses: $14.4 billion
- Other income (expense), net: $50 million
- Income taxes: 7.2 million1
This gave the company a net income of $40.3 billion in Q4 2023.
Can Income Be Higher Than Revenue?
Income can generally never be higher than revenue because income is derived from revenue after subtracting all costs. Revenue is the starting point and income is the endpoint. The business will have received income from an outside source that isn't operating income such as from a specific transaction or investment in cases where income is higher than revenue.
Is Revenue or Income More Important?
Both measures are important and income is derived from revenue but income is generally considered more important. Income is profit that shows that a business can cover its expenses and use that profit to grow the business. It won't have to rely on outside sources such as debt to continue operating. Strong revenues indicate that a business can sell its product or service but strong profits indicate that a business is in good financial health.
What Are the Advantages of Revenue Management?
Revenue management allows a company to better manage its sales tactics and its costs such as the need for raw materials. It can help it to offer a better price point to customers, run operations more efficiently, and keep inventory slim.
The Bottom Line
Companies report several important financial metrics each quarter including revenue and income. Revenue refers to money earned from a variety of sources. Income is any money that's left over after all expenses are accounted for including taxes and other costs. These two figures are often used interchangeably because they refer to the money a company earns, but they're quite different in fundamental ways.