Revenue vs Profit: Why the Difference Matters

A complete understanding of revenue and profit are integral to developing a basic understanding of how businesses make money. A common misconception is that the words can be used interchangeably, but in almost all cases, that isn’t true. So what is the difference?

The revenue is the amount of money a company receives in exchange for its goods and services. The profit a business makes is equal to the revenue it takes in minus what it spends as costs. It’s also important to note that the revenue can be higher than the profit, but never lower than the profit. The revenue and profit can only be equal when there is zero cost, which is very rare. So, while the two terms are closely related, they are not the same thing.

“Revenue = # of units sold x selling price ($)
Profit = Revenue - Cost”

In short, revenue is the total amount of money earned, while profit is the total amount of money earned minus the costs. So what are considered costs? A cost is any charge associated with running the business and producing the goods. These include rent for bills (water, electricity, rent, etc.), raw materials, and costs for staffing. While these terms are important in the business industry, they are also relevant in everyday life, so it’s important to understand how to calculate them. To calculate revenue, multiply the number of units sold by the selling price. To calculate profit, subtract the totaled costs from revenue.

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But let’s use these terms in the context of a lemonade stand. Let’s say you have a lemonade stand at a marathon which costs $10 to build and the raw materials for the lemonade (lemons, sugar, etc.) cost $5. In a day, you sell 25 cups of lemonade for $2 each. What was the profit and revenue of the lemonade stand for that day? (Answers and explanations are below). 

• Revenue

  Revenue: $50. The revenue is calculated as the number of units sold (25 cups of lemonade sold) multiplied by the selling price ($2 per cup of lemonade).

  # of Units Sold x Selling Price = Revenue

  25 x $2 = $50

  Revenue = $50

• Cost

  Costs: $15. The cost is calculated as the sum of all costs to run the business. In this case, the lemonade stand cost $10 and the materials it took to make lemonade cost $5.

  $5+$10= $15

  Cost = $15

• Profit

  Profit: $35. The Profit is the revenue subtracted by the cost. We already calculated revenue as $50 and cost as $15.

  Revenue - Cost = Profit

  $50- $15 = $35

  Profit = $35