Revenue, Net profit and Gross profit

Sad1ash
Jan 31, 2023
3 min read

Updated: Feb 2, 2023

I would be discussing revenue and profit by stating their meaning and usefulness. The blog goes into depth and provides examples to make it easy to understand. I will also discuss the difference between net profit and gross profit.

By Sadia Arshad

It is important to understand the difference between revenue and profit when selling products or services even if you are just beginning. This is because it is necessary for the calculation of your capital. It will help you determine whether you are breaking even or losing money. You don't need to own a business for these terms to be relevant to you.

Revenue

Let's start by understanding revenue. In the simplest term, revenue is the total amount of money you make by selling something (a product or service).

I'll use an example to make it easy to understand. Imagine:

Tom bought a shirt online for £7. When it arrived, he didn't quite like it and the place he bought it from doesn't accept returns. So, he decided to sell it on the Facebook market for £10.

That £10 is his revenue because that is what he earned by selling the good (item).

Profit

On the other hand, profit is how much extra you make by selling an item or service. If you put this in a mathematical formula, it would look like this:

Profit= revenue - cost (how much you spent on the item)

So, going back to the previous example:

Tom's revenue is £10 because that's what he got by selling the shirt.

And his cost is £7 because that's how much he spent on it.

Therefore, his profit is = 10 - 7 = £3

He makes a profit of £3. That's how much extra he got by selling the shirt. He would have lost the £7 if he had thrown the shirt in the bin. However, by selling it for £10 he made an extra £3 (a profit of £3).

Gross profit

Gross profit is only related to the items sold you have sold and their expenses. Hence the formula is like this:

Gross profit = Revenue - Cost of item/items sold

Following the previous example, we can say that Tom's Gross profit is £3 (£10 - £7).

£7 is the cost of the goods/item sold. You can also say that Gross profit is the revenue from the sold items - the cost directly linked to the items.

Net profit

Net profit is the amount of money left after deducing ALL the expenses from revenue or your total income.

You might see two different formulas for calculating net profit. Both of them are right and mean the same thing.

Net profit = Total income - Total outcome/cost

Net profit = Gross profit (Revenue-cost of good) - Expenses (all costs except the cost of good)

Now imagine, Tom delivers the shirt and spends £3 on the petrol for the delivery. Meaning, his net profit would be:

£3 (gross profit) - £3 (expenses) = £ 0

£10 - (£7 + £3) = £10 -£10 = £0

As you can see, Tom does not make any profit. Instead, he is breaking even. Breaking even means that your profit is £0 and your loss is £0, so you do not make any profit or loss. As you can see, Tom does not make any profit. Instead, he is breaking even. Breaking even means that your profit is £0 and your loss is £0, so you do not make any profit or loss. Now, there is no major issue with this as you do not make a loss and in Tom's case, it is fine. However, a business should be aiming to make a profit.

If Tom wants to make a profit, then he can add a delivery charge of £3:

Total revenue = £10 + £3 = £13

Total costs = £7 + £3 = £10

Gross profit = £13 - £7 = £6

Net profit = £13 - £10 = £3

= £6 - £3 = £3

I hope this helped you understand these terms and their formula. Do not hesitate to contact me if you need to.