A breakdown of how revenue and net income work, and why getting them right starts with better invoicing.
Understanding the difference between revenue and net income isn’t just for accountants, it’s essential knowledge for freelancers, small business owners, and anyone managing their own finances.
These two financial metrics tell very different stories about your business, and mixing them up can lead to poor decisions, especially when it comes to pricing your services, tracking growth, or planning for taxes.
In this article, we’ll break down what each term really means, how they impact your bottom line, and why it matters when you’re trying to grow a healthy, profitable business.
Key Takeaways:
Revenue is the starting point of your business’s financial story, it’s the total income your company earns from sales, services, or other income-generating activities. Whether you’re selling products, offering services, or earning interest, revenue is the raw figure that reflects how much money is coming in before expenses are taken into account.
There are several types of revenue, and understanding the differences is key to staying compliant, making informed decisions, and tracking growth effectively:
When reporting revenue, it’s also important to distinguish between gross revenue and net revenue:
To put this in perspective, small businesses with 1 to 4 employees average about $387,000 in annual revenue, while businesses with 10 to 19 employees average $2.16 million annually. These benchmarks highlight how revenue typically scales with business size and can help guide your expectations.
Accurately reporting revenue is essential for understanding your financial health. It helps you measure business performance, stay compliant with tax regulations, and make smarter long-term decisions.
Net income, also known as net profit, is the amount of money a business keeps after covering all of its expenses. This includes operating costs , cost of goods sold (COGS), taxes, interest, and any other financial obligations. In simple terms, it’s what’s left over after you’ve paid all the bills.
While revenue shows how much your business brings in, net income reveals how much you actually earn. It’s one of the most important indicators of a company’s overall financial health, and it’s closely watched by business owners, investors, and lenders alike.
You can calculate net income with this simple formula: Net Income = Total Revenue – Total Expenses
A few key factors that influence net income include:
Net income varies widely by industry. For example, financial data and stock exchanges see average net profit margins of around 28.2%, while sectors like food distribution operate on razor-thin margins of just 0.3%. These benchmarks help businesses gauge how they compare within their field.
Analyzing your net income helps you understand profitability, uncover inefficiencies, and make more informed decisions about pricing, spending, and scaling your business. It’s a core part of every financial report and a metric worth tracking regularly.
In small business accounting, understanding the difference between revenue and net income is essential for evaluating your company’s financial performance. While both figures appear on the income statement, they reflect very different aspects of how your business is doing, and both play a key role in the accounting cycle.
Revenue is often called the “top line” because it appears at the very top of the income statement. It represents the total amount of money generated from business activities, typically from net sales of products or services, before any expenses are deducted.
Net income, by contrast, is known as the “bottom line.” It’s the final number on the income statement and reflects your gross income minus operating expenses, taxes, interest, and other costs. In short, revenue shows what you earned, and net income shows what you kept.
During the accounting cycle, revenue is recorded early as part of your company’s earnings. From there, you subtract all related expenses over the reporting period to arrive at net income. This final figure is a key metric used in profitability ratios , which help assess how efficiently your business converts sales into actual profit.
Together, these metrics offer a more complete picture of your financial health. Revenue shows your earning potential; net income shows how efficiently you’re turning that revenue into lasting profit.
To get a clear picture of your business’s financial health, knowing how to calculate both revenue and net income is essential. These calculations are the foundation for making informed, smart business decisions.
Calculating revenue is straightforward. It’s the total money your business earns from selling products or services, which you can find by multiplying the number of units sold by the average price per unit:
Revenue = Number of Units Sold × Average Price per Unit
For example, if you sell 100 units of a product priced at $10 each, your revenue would be: 100 × $10 = $1,000
This total reflects the gross income before any costs or expenses are deducted.
Calculating net income involves subtracting all the expenses associated with running your business from your revenue. The formula looks like this:
Net Income = Revenue − Total Expenses
Where the total expenses include the cost of goods sold (COGS), operating expenses, taxes, interest, and other costs.
For example, if your revenue is $1,000 and your total expenses add up to $700, your net income would be: $1,000 − $700 = $300
To break it down further, the calculation often follows these steps:
Mastering these formulas helps you accurately assess your business’s profitability and overall financial health, enabling better planning and decision-making.
Knowing the difference between revenue and net income is crucial for making informed decisions that drive your business forward. These two financial metrics offer valuable insights into your company’s overall financial health and profitability, but they tell very different stories.
Understanding how revenue and net income relate helps you identify opportunities and challenges in your operations. For example:
If your revenue is growing but your net income is shrinking, it’s a clear signal that expenses may be too high. Recognizing this early allows you to take action—whether by cutting unnecessary costs, optimizing processes, or renegotiating supplier contracts—to protect your profit margins .
One often overlooked way to improve your bottom line is by streamlining how you manage invoices and payments. Using a solution like Tofu’s Invoicing App can reduce administrative overhead and speed up cash flow, helping you maintain tighter control over both your revenue and expenses.
These metrics are also foundational for analyzing your business’s financial performance and communicating that performance to stakeholders. For instance, they are used to calculate important profitability ratios such as the profit margin, which shows the percentage of revenue that turns into profit.
By mastering the difference between revenue and net income, you’ll be better equipped to communicate your company’s financial health clearly and confidently. This knowledge empowers you to make strategic decisions that help your business grow sustainably.
Understanding the difference between revenue and net income gives you a clearer picture of how your business is performing. It’s not just about how much money comes in, it’s about what you actually keep after all the costs are paid. These insights help you make smarter decisions, improve efficiency, and ultimately increase profitability.
But knowing your numbers starts with tracking them properly, and that begins with how you invoice your clients.
If your invoicing system is slow, inconsistent, or messy, your revenue can be delayed, overlooked, or even lost. That directly affects your net income and your ability to grow. That’s where Tofu can make a difference.
With the Tofu Invoicing App, you can:
To build a more profitable business, you need better tools, and it starts with how you bill. Try the Tofu Invoicing App today!
The difference between revenue and income lies in what they represent. Revenue is the total amount of money a company earns from its sales or services before any expenses. Income, commonly referred to as net income, is what’s left after subtracting all operating and non-operating expenses, including taxes and interest. Understanding both is key to evaluating a company’s financial health.
Strong revenue indicates a healthy demand for your products or services and reflects a company’s revenue-generating ability. While high revenue doesn’t guarantee profit, it's a crucial starting point. Consistently strong revenue supports long-term growth, improves cash flow, and provides more opportunities to invest back into the business.
No, revenue and operating profit are very different. Revenue is the total amount generated from sales, while operating profit (also called earnings before interest and taxes, or EBIT) is what's left after deducting operating expenses like salaries, rent, and materials. Operating profit shows how efficiently your business runs day to day, before financing costs or taxes are considered.
On a standard income statement, a company’s revenue appears at the very top, it’s often called the “top line.” Income, or net income, is listed at the bottom, showing the final company’s income after all expenses. This layout helps clearly show the difference between revenue and income throughout the reporting period.
Earnings before interest and taxes (EBIT) is an important measure that falls between revenue and net income on the income statement. It shows a company’s income from core operations, excluding the effects of financing and tax strategies. EBIT helps business owners and investors understand operational performance more clearly than net income alone.