Revenue vs Gross Profit: Understanding Key Financial Metrics

Other expenses, including a $248,000 loss in income, further reduced revenues, culminating in a net income of $36.3 billion, found at the bottom of the page. Here’s an image of Best Buy Co Inc.’s (BBY) income statement covering its 2024, 2023, and 2022 fiscal years. Gross profit and net income are closely watched by companies, investors, and other stakeholders. Let’s say a company sells widgets for $5 each on net-30 terms to all its customers. It invoices its customers on net-30 terms, so they won’t have to pay until 30 days later on Sept. 30. August’s revenue will be considered accrued revenue as a result until the company receives payment from its customers.

What is Opportunity Cost in Business and Why it Matters for Growth

It’s the revenue earned by a company for the delivery of goods or services that customers have yet to pay for. For many business owners, accountants, and financial teams, this crucial time of year is riddled with challenges and stress. Net income, often referred to as bookkeeping the “bottom line,” takes into account all revenue and all expenses from the accounting period. A good profit margin isn’t defined by a specific number, but by your company’s ability to maintain sustainable profitability within your competitive landscape. While higher margins generally indicate efficient operations, what qualifies as “good” varies greatly across sectors.

How to use the gross profit method to increase profits

A company’s gross profit is not just for reflecting on the profitability of a company, it can also be used to increase profits. As we’ve previously discussed, gross profit is an indicator of a firm’s profitability but disregards some additional expenses the company incurs like operating costs. It’s important to note that gross profit is different from net income. To calculate net income, you must subtract operating expenses from gross profit.

Key Differences Between Revenue, Profit, and Income

Gross profit calculations only include revenue and Cost of Goods Sold, so you can ignore the Administrative Costs and Salary that are also included on your income statement. These are fixed costs and can be used as part of net profit calculations, but aren’t needed for gross profit. Gross profit margin is a financial metric used by analysts to assess a company’s financial health. It’s the profit remaining after subtracting the cost of goods sold (COGS).

• Overhead costs not directly related to sales, such as payroll taxes, building rental, and administrative expenses, are not generally included in the cost of revenue.
• Gross profit margins differ greatly across industries, reflecting the distinct cost structures and business models of each sector.
• Gross profit and net income are closely watched by companies, investors, and other stakeholders.
• Tracking gross profit over multiple periods can reveal trends in a company’s operational efficiency and pricing power.
• These steps help accountants recognize revenue as either gross or net by identifying each party’s performance obligation and their control of the good or service.
• Gross revenue retention measures the revenue lost from the company’s customer base, not accounting for expansion revenue obtained from cross-sales and upsells.
• Net profit shows how much money your business really makes after paying all costs.

To find your sales revenue, either look at your financials, like income statements, or calculate all of your earnings gross profit for the term you’re looking at. Profit is the portion of that income that remains after subtracting that company’s operating costs, debts, taxes, and any other expenses it incurs in the interest of generating revenue. Gross profit only considers direct production costs, while net profit accounts for all expenses, including operating costs, taxes, and interest. It is a key profitability metric that shows how efficiently a company generates profit from its core operations before accounting for overhead expenses, taxes, and interest. Gross profit is a crucial indicator of a company’s financial health. For all types of investor, understanding key performance indicators is vital to assess a company’s health and profitability.