Revenue vs. Gross Profit: What’s the Difference?

Revenue, also called sales revenue, is the total amount of income earned from selling goods or services associated with a company's core business operations. More simply, revenue is income earned from sales before deducting any business expenses. Revenue is also called the “top line number” because it's typically located on the top of a company's income statement.

To calculate sales revenue, simply multiply the average price of your product per unit by the number of units sold, as seen in the following equation:

Revenue = Average Price of Service x Number of Units Sold

If your company provides a service instead of selling a product, alter the equation:

Revenue = Average Price of Service x Number of Customers

A company's gross profit is the amount of income left over after subtracting the cost of producing and selling its products from its total sales revenue. While total revenue indicates how much money a company receives in exchange for selling its goods, gross profit reflects how much money it actually earns from those sales since it factors in the cost of goods sold (COGS).

Gross profit is a valuable metric because it shows whether a company's production process needs to be more or less cost-effective compared to its revenue. For example, if gross profit decreases due to a spike in shipping costs, you could try to switch to a cheaper shipping service or reduce the weight of your product packaging.

To calculate the gross profit figure, subtract the cost of goods sold (COGS) from total sales revenue, as seen in this equation:

Gross profit = Revenue - COGS

In the equation, revenue represents the total amount of money earned from product sales and COGS represents the variable direct costs of producing products— costs such as raw materials, equipment, employee labor, and shipping. When calculating gross profit, some companies may substitute net sales in place of total revenue. Net sales is similar to total revenue, except it deducts the price of refunded or returned sales, allowances, and discounts.

Gross profit deducts the cost of goods sold (COGS), while revenue does not deduct any expenses or costs from a company's total income earned. Gross profit is a more useful metric for analyzing a company's profitability and financial health. No matter how high a company's revenue, their expenses could be higher, resulting in a net loss.

There are different metrics you can use to track your company's financial health and compose your company's financial statements:

1. 1. Gross profit: Gross profit is the amount of income left over after subtracting the cost of goods sold (COGS) from the total sales revenue. This metric indicates whether a company’s production process needs to be more or less cost-effective in comparison to its revenue.
2. 2. Net profit: Calculate the net profit (aka net income) by subtracting total expenses from total revenue to see exactly how much a company profits (a new profit) or loses (a net loss). A company's net income over time is a great indicator of how well or poorly its management team runs the company.
3. 3. Operating profit: To calculate operating profit or earnings before interest and taxes (EBIT), subtract operating expenses—which include overhead costs like rent, marketing, insurance, corporate salaries, and equipment—from gross profit. Investors find EBIT useful in determining a company's financial performance because it doesn't factor in items that are out of the management team's control.
4. 4. Gross profit margin: A gross profit margin is the percentage of revenue generated that's greater than the COGS. To calculate gross profit margin, divide gross income by revenue and multiply the result by 100.
5. 5. Net profit margin: Net profit margin is the ratio of net profit to total revenue expressed as a percentage. To calculate the net profit margin, divide your net income by total revenue and multiply the answer by 100.

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