Revenue vs. Profit: What’s the Difference for Small Businesses?
While increasing quotes and invoices might make you think you’re rolling in the dough, your expenses may be growing, too.
Rent, employee labor, materials, equipment, and even low-profit or unprofitable jobs all need to be accounted for when considering your business’s financial health.
So, how does your business stack up when it comes to revenue and profit?
What you need to know about revenue vs. profit:
What’s the difference between revenue and profit?
It may come as a surprise, but revenue and profit are not the same things. While revenue is the money coming in from your services, profit is what your business actually gets to keep after subtracting expenses.
What is revenue in business?
Revenue is the total on your invoice or the total amount of services you sold and completed in a period of time.
Also referred to as gross sales, it’s the total amount on your customer’s invoice or the top line on an income statement or a profit and loss statement.
READ MORE: Smart strategies to increase revenue
To calculate your operational revenue, use the following formula:
Sales revenue = Units sold x Sales price
For service businesses, the units sold will be the number of hours. The sales price will be the hourly rate.
What is profit in business?
Your company’s profit is the remaining revenue after you’ve subtracted all operating expenses and costs from your total sales.
Costs can include:
- Wages for your employees
- Your salary
- Fuel for driving your truck or equipment
- Equipment, parts, or materials needed to complete the job
- Other monthly business expenses
To calculate your operating profit, use the following formula:
Gross Profit Margin = Net sales – Cost of goods
For service businesses, the cost of goods will include any materials, supplies, and labor costs to complete the job.
How is cash flow different from revenue?
Revenue is incoming funds including money earned from the sale of your products or services.
If your business has enough money to handle expenses with extra left over, this is positive cash flow. That means you’re turning a profit.
On the other hand, spending more than you’re earning is negative cash flow. When you have negative cash flow, your business currently isn’t profitable.
Other revenue and profit terms to know
|Revenue (sales)||Also known as sales on an income statement, revenue is the income dollar amount you’ve generated from operating your business, selling goods, and selling services.|
|Gross Revenue||This number is all the income from a sale that is made in total. It doesn’t include the cost of goods sold, operating costs, or other expenditures you have made to create the good or service (such as payroll or quantity of materials).|
|Net Revenue||This number is calculated by subtracting the cost of goods sold from gross revenue, and any adjustments you’ve made on goods or services sold (e.g., refunds, price matches). Net revenue doesn’t include other business operation expenses like payroll, rent, and utilities, for example.|
|Profit||This is the absolute dollar amount of money you made as income after subtracting the cost of goods sold, expenses, and payroll.|
|Gross Profit (profit, sales profit, gross income)||Gross profit is the profit your business makes after deducting all costs of goods (COGS). This includes the manufacturing and selling of your products and services.|
|Net Profit||Net profit is the total profit your business earns after subtracting your COGS, any operating expenses, taxes, and interest.|
Net profit can provide a clear picture of your company’s health and overall cash flow.
|Profit Margin||Profit margin is the number at which your profit exceeds (or does not exceed) your revenue. It is used to indicate how many cents of each sales dollar is generating profit for your business.|
|Profitability||Profitability is a relative term. It’s an indicator of how profitable a business is in relation to its size. Profitability indicates business efficiency and can indicate that a business is worth investing in.|
Is revenue or profit more important in business?
Profit is more important than revenue in business.
A company’s net profit shows exactly how much you made, after deducting all other expenses. It can indicate your year-over-year growth, how much you have to reinvest, and the overall financial health of your home service business.
But your business’s sales (revenue) are extremely important as well. After all, without revenue, you’ll have no profit. So while profit comes first, revenue is a close second.
How can you strengthen your revenue and profit? 6 easy steps
Improving your business’s health doesn’t happen overnight. It requires both a short- and long-term strategy to strengthen your revenue and profit.
Here are 6 tips to get you started and grow your bottom line:
1. Don’t rely solely on your bank account
Your bank account may be a great indicator of the amount of work you’ve invoiced, but it’s missing the stack of invoices you have to pay, including:
• Payroll for employees or contractors
• Repair bills for equipment
• Cost of fuel for company vehicles
Having lots of money in the bank is wonderful. But just be sure to keep subtracting your expenses from your revenue to keep a close eye on your actual profit.
2. Set smart business goals
Achieving your revenue goals does not mean you run a successful small business.
After all, you could hit a million dollars in revenue but only make $20,000 profit because your expenses were higher than your revenues.
To improve your business’s financial health, you should target the following three goals:
• Income goals: How can you generate more service sales?
• Expense goals: How can you lower your business expenses or improve efficiencies?
• Profit goals: How can you improve your gross profit margin to achieve your profit goals?
3. Track your costs
There are a lot of upfront costs in the home service industry. Regardless of your service offerings, as a business owner, you need materials and supplies to complete the job.
Residential or commercial cleaners need cleaning supplies, appliance repair services need parts and tools, and lawn care professionals need equipment and fertilizer.
Tracking your total expenses can help you improve your pricing strategy to recoup your losses.
Here are some examples of the costs your service business should be tracking:
Labor costs, including:
• Cost of employee salaries
• Hiring, training, and retaining new employees as your business grows or as you experience employee turnover
• Social security, employment insurance, and benefits (if you offer them)
Materials and supplies, including:
• The cost of tools and equipment required to complete the job
• The cost of parts, materials, or supplies needed to perform the service
Cost of business, including:
• The amount of time it takes to run to the hardware store and pick up materials
• The fuel cost involved in getting to a store or the job site
• The wear and tear on a vehicle that’s involved in a job
• Any other business expenses, including marketing, phones, utilities, rent, etc.
4. Identify your high-value, low-cost services
A high-value service is something your customer wants that can be performed in little time and for a low material cost.
For example, residential cleaners may choose to offer window cleaning as an additional service. The cost of the service is low, and most customers won’t want to do it themselves.
Go through your service list and identify these low-margin jobs. Then start to think about how you can advertise or offer these services in addition to your regular offerings.
Maybe you upsell them, market them as “add-on services,” or package them all together as a special offer.
5. Be strategic with loss leaders
A loss leader is a type of pricing or marketing strategy that’s designed to attract new business and create repeat customers by selling your services at an unprofitable price point.
This could be an introductory offer like special pricing for the first month, or including a freebie, like complimentary salting with your first snow removal services.
The goal with loss leaders is to grow your client base and book more sales. Then make more money down the line with an upsell or future services.
6. Organize your home service business
Your services may be second to none, but if your business is unorganized, chances are your profit margins are suffering.
Getting your business organized can help you spend less time on administrative tasks and take on more work.
Jobber can help you better organize your service business with the following features:
- A field service CRM to track customer info and job details
- Professional-looking quotes that are easy for clients to approve
- Easy scheduling and dispatching in just a few clicks
- Client communications like appointment reminder texts and follow-up emails
- A convenient mobile app to help you run your business, even on the go
- Invoicing and payment options to improve your cash flow
The bottom line: revenue vs. profit for service businesses
Your home service business depends on both revenue and profit to succeed.
But it’s all about balance.
As your total revenue grows, make sure to monitor your profitability and adjust your margins as necessary.
Jobber has the right tools to help you track your expenses, collect payment from customers, and create a profit margin that sets you up for success.
Originally published March 2020. Last updated on December 23rd, 2021.