What is revenue and how does it differ from profit?

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Every aspiring entrepreneur is faced with the need to carefully understand financial terminology. Even if a very competent accountant works for him, he himself needs to understand the basics of production and income generation. In particular, it is important to know what revenue is, how it differs from profit, how its level affects the operation of the enterprise and how it is possible to plan it.

The concept and methods of accounting

Very often, those who are just thinking of their own business or are at the very beginning of a business path have a wrong idea of what revenue is. Often it is confused with the net income of the enterprise, which causes miscalculations in the planning of activities. The result is usually bankruptcy. Meanwhile, it is very easy to understand the difference. Revenue is the result of the sale of products, work performed or services rendered. It consists of cash receipts received as payment for goods (barter) and receivables. In addition, revenue is considered the financial result of investment activities when selling non-current assets or securities. Howeverit is mainly determined by the total operating income.

To account for revenue, accountants use two methods:

• Cash - when payment received on accounts in cash or commodity equivalent is accepted as revenue. This method is used by enterprises whose revenue does not exceed a million rubles per quarter based on the results of the last year of operation.
• Accrual method - when revenue is calculated immediately upon the shipment of goods to the buyer or the provision of services, regardless of the actual receipt of payment. In this case, the risk of unpaid debts is higher, so the company is allowed to create a reserve fund, reducing taxable profits.

Calculation and planning

Revenue is the main source of financial income for the enterprise, the stability of turnover and work in general depends on its regularity. That is why it is extremely important to analyze sales revenue in a timely manner and plan for its receipt.

The analysis is based on the difference between the volumes of manufactured and sold products. In addition, it is important to take into account the factors affecting the receipt of revenue. The main reason for the low level of profitability of the enterprise may be the release of unclaimed or low-quality products. To track this situation, it is necessary to conduct market research. In an effort to increase revenue, the company, based on the results of such an analysis, can improve the quality of products, reduce the rate of output (in case of overproduction),change or expand the assortment.

In addition, the level of revenue may be affected by:

• outages due to various reasons;
• wrong pricing policy;
• wrong marketing approach;
• violation of contractual terms by suppliers, carriers or buyers;
• inflation, changes in legislation.

Among these factors, there are those that can be influenced by the entrepreneur himself, and there are those that are beyond his control. However, a regular analysis of revenue may, for example, show the need to change the supplier of raw materials or the carrier. Indeed, the result of work depends on the quality of partnerships no less than on the characteristics of products or services provided.

When planning revenue, three calculations should be made. The first is a pessimistic forecast, assuming the worst-case scenario. The second is optimistic, taking into account the ideal confluence of all circumstances. The third is a real calculation, which is something in between the first two. It should be guided in the process of activity.

Yet the basis of planning is already received revenue from the sale of products. The formula for its calculation is simple: РхЦ=В, where "P" means sold products in units (or work performed, services rendered in quantitative terms), "P" means the price for each unit, and "B", respectively, received revenue. Only after performing the calculation and analysis, it is possible to build the prospects for the growth of the enterprise.

Distribution

Having understood what revenue is, you should deal with its further distribution. The initial source of funds of the enterprise is the authorized capital. In the process of further activities, all necessary payments are made directly from the cash desk. Thus, the proceeds cover the necessary payments to the budget, tax and social payments, utility and raw material costs, wages of employees and other costs associated with the production and sale of products. Only what remains after making all the necessary payments is the net income or profit of the enterprise.

From all of the above, it is clear that the goal of every entrepreneur is to increase the total income. For this growth to be stable, it is important to clearly understand what revenue is and what factors affect its receipt. Competent analysis and planning to a large extent help the company to operate and develop successfully, and the owner to receive a well-deserved profit.