Although it may seem basic to some, there’s still a large number of private practice owners who don’t know the difference between profit and revenue. Not understanding these numbers will affect how you track your business’s success and will likely cause you to miss opportunities to save money or make more money.
According to this Small Business Chron article, “Revenue is the total amount brought in from goods and services sold… Profit is the net income of a business. In general, profit equals revenue less expenses.”
Profit is the long-term goal of any for-profit business and often companies measure different forms of profit. “Gross profit shows the total revenue minus the variable costs, or cost of goods sold,” (Chron). To determine total profit for a specific period, operating income and non-operating activities are either added or subtracted from the gross profit number.
Revenue is earned every time you sell a product or service for cash or credit. Selling on credit encourages buyers to purchase more frequently and spend more. “Accounts receivable” is the account used to maintain credit purchases. Accounts receivable is considered earned revenue as soon as the buyer receives their product or service, but it’s not “usable cash until the account is paid.”
Profit and revenue are often incorrectly used to describe the same thing. The terms are not the same—as you have learned from the explanations above. Simply, revenue is all the sales a company brings in, profit is all the money remaining from revenue after all expenses are paid.
Without both revenue and profitability, a small business can’t be successful. Revenue is the lifeblood of your business.
Although you can keep your doors open by breaking even, a healthy profit margin allows you to grow your business and reduce debts. Generating high profits should be your goal so you can set aside capital for maintenance, expansion and a strategic growth plan. A high profitability will set you up for financial security when you exit your business. If you’re looking to sell your business, potential buyers will most likely be making offers based on multiples of your profitability.
Whether you just started out in private practice or you’ve been in business for 20 years, revenue and profit should be financials you’re in control of and growing every year. A time will come when it’s time for you to retire, pass your business on to an employee or family member, or sell your business.
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