What is most important for a business? Generating Revenues or earning Profits?

It is a known fact that every business organisation is set up with a sole intention of earning profit. When a business is set up and begins its operations a lot of money is spent for undertaking various operations and every business expects to receive something in return for the amount spent. This return is called by different names like Profit, Gain, Revenue, Income etc.

Even though Revenue and Profit is used interchangeably they mean different things.  Revenue is the income generated from sale of goods or services, or by use of capital or any other assets associated with the main operations of an organisation before any costs or expenses are deducted. In other words Revenue means the amount receivable from sale of goods and services. On the other hand Profit is the excess of revenues over its related expenses during an accounting. In simple terms if the organisation earns more than it has spent, it has made a profit.

Revenue is the total amount received by a business. In accordance with the revenue recognition principle and matching principlerevenue should be always recognised when a business entity has delivered the goods/ services to its customers and not when the money is received. So, the revenue is recorded when it is earned – not when the cash is received.

The sole objective of running a business is yielding a financial profit. Needless to say, profits are important for businesses to determine the value of a business entity. A company’s net income or profit is defined simply in this way: Net Income = Revenues – Expenses + Gains – Losses. Profit is one of the most important elementson financial statements. Both revenues and Profitsare important to measure and to assess the company’s performance and prospects.

Generating revenues is highly important for a business organisation a company cannot make profits unless revenues are generated on a regular basis. The very essence of Profitability is Revenue. And in order to get greater profits, revenues must be raised. There are times when revenue growth is more important than profits. There may be cases where a company could have high revenues but still not be profitable, while on the other hand there may be instances where a company could have very low revenue, but nevertheless turn most of that revenue into profit for the company’s owners. Hence, it is crucial for the business organisation to look at revenues and findways to raise revenues, so that a business may attain efficiency, profitability and sustainable success.

About the author

FAME is a leading Accountancy training provider. FAME brings together under one roof a wide range of accounting courses blended with real world experience and practical application. FAME aims to bridge the gap between theoretical knowledge and practical challenges that accountants face in their day to day working. We provide practical workplace skills for finance staff meeting the needs of employers, bankers, government and learners, both now and in the future. Our students are integral to the success of an organisation and at the heart of ensuring the smooth running of an accounting department.