Income vs Revenue | Income Statement Metrics
If you’re just starting out as a business owner, or even evaluating financials as a potential investor, you may not know the difference between income vs revenue. In this article, we’ll explore the differences between income vs revenue in detail and provide some real world examples.
Income vs Revenue: What’s the Difference?
To put it simply–income is the “bottom line” of a business and revenue is the “top line” of a business.
Income represents how much money the business can bring in after all expenses have been deducted and revenue represents how much money the business can bring in before any expenses.
What is Income? The Bottom Line
Generally, when people refer to income, they are referring to a business’s “net income”. This refers to the final amount of cash that a business is able to bring in after all expenses have been subtracted, including more elusive items like depreciation, amortization, taxes and interest expense, which we won’t cover in this article.
Examples of Income: What does it look like?
Let’s say you run a business selling coffee beans online. Here’s what your income number would look like:
| Category | Explanation | Value | |
|---|---|---|---|
| Sales | |||
| Revenue | the "top line". Simply the sum of all items sold x price it sold for | $3,000 | |
| Cost of Goods Sold | costs directly associated with selling that product, for example, the price beans you buy before processing it into consumable coffee beans | $500 | |
| Operating Expenses | |||
| Marketing | money spent to promote your coffee beans to acquire customers | $200 | |
| Website Hosting | money spent to host and maintain your website | $100 | |
| Website Development | additional money spent to build and upgrade your website | $300 | |
| Net Income | The "bottom line". Income figure we are looking for | $1,900 | |
Net income example
Income is generally calculated as:
Revenue - Cost of Goods Sold - Operating Expenses = Income, or Net Income.
What are Operating Expenses?
Operating expenses are simply expenses that are required for the normal operation of the business. For our online coffee shop example, those expenses may include things like marketing, hosting the website, and paying a developer to maintain and upgrade the website.
The distinction is important, because there are often expenses in a business that are not considered operating expenses, such as: depreciation, interest expense, inventory write-downs, etc. Generally, these are not expenses you would incur on a day to day basis–thus the operating expenses category separates those expenses you would expect to continue to incur, versus those that are more unusual.
What is Revenue? The Top Line
Revenue is commonly referred to as the “top line” and that is because it is the first line item in an income statement, or P&L. Revenue is simply the number of units sold multiplied by the price it’s sold at. Note that you can sell multiple items at different prices and in different quantities, revenue is the sumproduct of all of them.
Price of Item(s) x Number of Items Sold = Revenue
You can think of revenue as the sheer amount of cash a business is able to bring in, before any expenses have been deducted. Of course, every business has expenses and thus just looking at a revenue figure by itself never really makes sense.
Examples of Revenue:
Here’s the same example from above for our online coffee shop, with revenue highlighted.
| Category | Explanation | Value | |
|---|---|---|---|
| Sales | |||
| Revenue | the "top line". Simply the sum of all items sold x prices it sold for. Figure we're looking for. | $3,000 | |
| Cost of Goods Sold | costs directly associated with selling that product, for example, the price beans you buy before processing it into consumable coffee beans | $500 | |
| Operating Expenses | |||
| Marketing | money spent to promote your coffee beans to acquire customers | $200 | |
| Website Hosting | money spent to host and maintain your website | $100 | |
| Website Development | additional money spent to build and upgrade your website | $300 | |
| Net Income | The "bottom line" | $1,900 | |
Which is Better–Income or Revenue?
There is no “better” metric, income and revenue represent different pieces of the business. But if you had to pick one, generally income is a better metric to look at.
That said, on one hand, income is a good indicator of how much money a business is able to take home after paying everything necessary to operate that business. On the other hand, revenue can be a good metric to gauge the size of a business and can be used in analysis to optimize for cost of goods sold and operating expenses.
Why is it Important to Understand Income and Revenue?
Both income and revenue can act as health checkpoints for your business. Many business owners have lucrative businesses with 6 to 7 figure revenue numbers, but take home very little–understanding income vs revenue can help bridge that gap and increase take home cash.
As standalone metrics, income represents how profitable your business is and revenue represents the size and reach of your business. When used together, business owners can create critical strategies to grow their business top line (revenue), or cut costs to improve the bottom line (income), or even both!
How are Income and Revenue Figures Used?
Income and revenue are both line items on the profit and loss statement and they’re use for different purposes. Here are some examples
Income vs Revenue in Financial Reporting:
In financial reporting, income acts as a quick measure of profitability, whereas revenue is a quick indicator of the size of a business. Revenue can also be a powerful starting point for businesses or consultants to evaluate when thinking about improving margins, or cutting operating expenses–it indicates how much the business “has to work with”.
Income vs Revenue in Investor Meetings:
In the investing world, both income and revenue are used for different purposes. Similar to financial reporting, investors typically have certain requirements when looking for opportunities. Income can often be one of the most important metrics as it directly highlights how profitable a business is and can inform an investor whether an opportunity is good or bad.
At the same time, for businesses that may have fewer expenses and a stronger top line, investors may use revenue as a multiple for valuation purposes (purchase price of a business).
FAQs:
What is the difference between revenue and income with example?
Revenue is the top line of a business: the sum of all products sold x their prices. Income is the bottom line of a business: revenue minus all expenses like wages, marketing, etc. If you sell 5 t-shirts for $5 each and it cost you $10 to create your t-shirt stand: revenue is $25, and income is $15.
Is revenue or income more important?
Both metrics are important and represent different measures, but income tends to be considered more important as it indicates profitability (or loss). Revenue can act as a good indicator of the size of a business and growth opportunities.
Can income be higher than revenue?
No–income should never be higher than revenue since income is revenue minus all expenses and is the “bottom line”. Revenue is the “top line” and has no expenses taken out. Revenue is the starting point, whereas income is the end point.
