If you are new to running a business, you may find some accounting terms confusing. Revenue, income, and profit are not interchangeable terms, and as an e-commerce entrepreneur, you should know the difference. Let’s look at the difference between revenue and income and how it relates to your business.
When you embark on a new business venture, it doesn’t mean you have to become an accountant overnight but if you have a rudimentary understanding of accounting terms you will find it easier to keep your bookkeeping up to date and to use the data for growth. Revenue and income are key terms, so here’s what you need to know.
What is Revenue?
Revenue is the amount that has come into your e-commerce business and is used to calculate profit and income. People sometimes refer to it as the “top-line” because it is the top-line on a financial statement. You may have heard the term “top-line growth”, which relates specifically to an increase in this figure.
You can calculate revenue using the following formula:
Income – any discounts – any deductions for returns* = revenue
*technically returns should only be factored into net sales, but they are often classed a revenue-deduction.
As an e-commerce entrepreneur, you must keep track of any discounts that are issued and your returns figures. Both are commonplace adjustments in the e-commerce sphere. Note that no expenses should be deducted from this figure. Additional income streams, such as office rental income or storage rental income, that are outside the scope of your primary line of business i.e. e-commerce, are also not included at this point.
When you are calculating your profit and income, you will use your revenue figure as a starting point.
What is Income?
Income, or operating income to give it its full name, is calculated by deducting your expenses operating expenses from your revenue.
You can calculate income using the following formula:
Revenue – operating expenses – depreciation and amortization = income
Note that you do not adjust for taxes, loan interest or business debt here. That is factored into profit. Again, don’t include any income or expenditure that is outside the realm of e-commerce. If you are unsure if something should be included, ask an e-commerce specialist accountant for guidance.
What is net income?
Income and revenue are also often compared to net income or profit. This is also sometimes referred to as the “bottom-line” as it is the last line in a financial statement.
Net income or profit considers all income and expenditure received or accrued for by your e-commerce business. This includes taxes, depreciation of goods, investment income, licensing income and anything else that has gone through your accounts and not come into play until this point.
Purpose of Income, Revenue and Profit
Remember that all three of these markers are crucial to gauge the health of your e-commerce business. If you look at all three figures together you will get a much clearer picture than if you look at one in isolation.
It is possible to have low sales but a relatively high profit (for example, if you have just begun trading and sell luxury goods), high revenue but a low net income (for example, if you incurred administrative start-up costs or have unneeded staff hours) or high income and revenue but a loss due to debt servicing.
How to use your income and revenue figures
While a high income figure is great, the difference between income and revenue figures can be a valuable indicator of your e-commerce business’ profitability. Sales don’t necessarily mean your business is sustainable. Review the difference to ensure your costs aren’t creeping up and your growth is genuine.
By analysing these figures, you will be able to make smart decisions on the future of your business – is it time to expand into new markets? Should you look at an R&D grant? Do you need to adhere to a budget for your operating expenses to expand the profitability of your goods?
We hope you are now clear on the difference between revenue and income, and also profit, but if you would like assistance to plan for your e-commerce business’ financial future, we are here to help. As e-commerce specialists, we can help you scale while minimizing the time you spend on your accounts by harnessing automation.
The best time to act is now.