Any business owner needs to know how to maximize their profit and to demonstrate to investors that the company is heading in the right path since revenue can indicate a firm’s potential.
The most important difference between revenue and profit is that while any company can increase its revenue, it may well be registering a net loss of earrings at the same time.
Revenue means the total amount of money that the company generated through its business activities (in other words, it is the total sales of the company).
- Gross profit
It is basically revenue minus cost of goods sold, on the income statement, gross profit appears directly after revenue, it is calculated by subtracting Cost of Goods Sold (COGS) from the total revenue.
As a metric, it is used by business owners to gain an idea of how much money they have with which to fund the business after their core product is produced and sold.
- Operating Profit
Operating Profit means Gross Profit minus all fixed expenses encountered when you run the business, such as rents, utility bills & payroll. It is used to demonstrate the earning power of any business in terms of its regular operations, removing external factors to show its potential profitability.
Some companies may choose to use Operating Profit over Net Profit to highlight the financial impact of external overheads. For example, investors can use Operating Profit to compare the business with a similar firm operating under a different tax structure.
- Net Profit
Whenever people start to talk about any firm’s profit, they usually refer to Net Profit which means the remaining income after all the operating costs, debts, expenses, interest and taxes are deducted.
Net Profit is the most important financial metric on the income statement, it is the most important figure to the investors and shareholders.
In terms of Operating Profit, Net Profit can be expressed as Operating Profit minus interest and taxes:
Net Profit = Operating Profit – Interest – Tax
- Net profit margin
The Net Profit Margin is the ratio of the company’s net income to its revenue, it is presented as a percentage.
Taking all of this into account, a business owner should always try to maximize his Gross, Net, and Operating Profits rather than just increasing sales revenue. Nevertheless, if operating expenses are kept under control, increasing sales revenue might well result in an increase in profits.