In today’s episode, we’re talking about the difference between revenue and income. We’re going to talk about how Profit First can help you with figuring out revenue and income.
This is a common mistake that we make: using terms of revenue and income interchangeably.
They are not interchangeable.
I’m going to tell you what revenue is. I’m going to tell you what income is. Then I’m going to tell you to forget about your income. I’m going to want you to focus on something else instead.
Let’s talk revenue.
Revenue is all the money you bring into your business, your total sales, and any other money that you may receive as a part of doing business, which is why you sometimes hear revenue deferred to as gross sales.
It’s all the money coming into your business. It’s the big number, way on the top of your P&L, otherwise known as a profit and loss statement, which is a very useful map of your money, which we’re going to talk about at a later date. You might hear revenue referred to as the top line, the top line.
I’m going to tell you right now, I don’t give a crap about your top line. I really don’t. Not a fiddle fart about your top line, I don’t care. I don’t care about revenue. It is for the most part a vanity metric. It’s like a check-in, like we need to check to make sure we have the right amount, and then we’re good.
Sometimes you hear people talk about booked revenue or banked revenue.
Booked revenue is how much money you have on the books from contracts that you have signed. Banked revenue is the cash received in the bank right now.
If you have a 12-month contract with a client for $24,000 and they are paying you $2,000 a month, I made this as easy as possible, paying $2,000 a month and it is March, they’ve made three payments, $2,000, $2,000, $2,000, that is $6,000 cash received, $24,000 minus $6,000 is $18,000 in booked revenue.
Received versus what you are due. One more time, revenue is all the money that you have received. When someone says they have a million-dollar business, that means that they have received one million dollars in their fiscal year which usually runs between January and December, of the calendar year. But some businesses like to be difficult and have fiscal years that span a different 12-month period. My husband’s business has a fiscal year of October to September, the same 12 months. It is all the money that you have made in the 12 months of your fiscal year.
Now when you’re in the online space, of course, they have to be extra and they get a little different, and they’re like, “I have a million-dollar business,” but really they’ve made a million dollars over three years. That is different in my opinion. That is not technically a million-dollar business. Always ask questions. Be critical in your thinking of what someone is telling you.
Let’s talk income.
I typically see the term income in more traditional business spaces, and more big business spaces, and it essentially means your earnings or your profit.
For our purposes as small-business owners, I want to keep the terms to revenue and profit for simplicity, which is why I’m a huge Profit First stan. It gives small business owners a simple framework for money and it gives a simple common language for you to communicate with your accountant, but also your partner or your spouse.
I want to keep us to Profit First terms.
Income and profit are similar. Income or net income is a company’s total earnings or profit. When investors and analysts speak of a company’s income, they’re referring to the net income or the profit in the company. This is usually then where we start getting into talk about EBITA (earnings before interest, depreciation, taxes, amortization).
Most of you in service-based businesses don’t have those things. We don’t need to get complicated. We don’t have things like amortization or depreciation. You don’t have machines, you don’t have a lot of assets. Let’s not worry about income.
Revenue? All the money your business makes.
Profit? The thing you get to keep.
Tune into the next episode where we’re actually going to talk about the difference between your owner’s pay and profit. These are the terms you need to know, not all that other complicated gobbledygook.