Earnings and Revenue are two major components in businesses that decide the growth level and sustainability. The key difference between earnings and revenue is that earnings are the difference between income and expenses for a period of time, whereas revenue is the total income that a company generates through trading products and services. Since both these two components are key financial indicators of a company, they are always used in the decision-making process.
CONTENTS
1. Overview and Key Difference
2. What are Earnings
3. What is Revenue
4. Side by Side Comparison – Earnings vs Revenue
5. Summary
What are Earnings?
Earnings is also synonymized as ‘Profit’ and is the main objective of a company. A company’s net earnings are recorded in the last line of the income statement (bottom line). Earnings will be calculated after deducting all the incomes from expenses.
There are three major types of Earnings. They are,
Gross Profit
This is calculated as the difference between revenue and cost of revenue. The cost of revenue takes into account all the direct expenses incurred in generating revenue. Cost of revenue is calculated as,
Cost of revenue = Beginning inventory + Purchases – Ending inventory
Profit Before Tax (PBT)
This is company’s earnings before payment of corporate income tax and is the profit figure that income tax is charged upon.
Net Profit
This is the income generated after considering all the other indirect operating expenses such as,
- Advertising expenses
- Legal expenses
- Rent, wages, interest expenses
Net profit is also commonly referred to as profit after tax (PAT). This is the portion of earnings that belong to the shareholders of the company after deducting corporate tax.
Profits are vital for the survival of business organisations as it is the aspect that shareholders are most concerned about. Part of profits will be distributed to shareholders as dividends, and the remaining will be retained and used for operations.
What is Revenue?
Revenue refers to the income earned by the company by conducting a business activity. If a company has many strategic business units, all of them will be revenue generating units for the company. In the income statement, revenue is recorded in the first line (top line).
Profit is not the sole objective of all companies; the majority of the businesses pursue revenue growth even for a certain period of time depending on various marketing strategies. If the company wants to implement a market penetration strategy or a market development strategy with the intention of developing a strong customer base then the main objective will be to generate revenue as much as possible.
E.g. Coca-Cola is operating in over 200 countries and their critical success factor is the distribution network which the company has invested in heavily in order to reach many markets as possible to increase market share. Furthermore, companies such as Unilever, McDonald’s and Microsoft have always adopted strategies to enter new markets to have a global presence.
In order to adopt large-scale expansion operations to increase the market share, companies have to incur significant costs in the form of advertising, selling and distribution costs. Thus, at the time of such expansion, profits will usually be low. However, once a loyal customer base is established the revenues will be guaranteed, and profits will flourish in the long term.
What is the difference between Earnings and Revenue?
Earnings vs Revenue |
|
| Earnings are the difference between income and expenses for a period of time. | Revenue is the total income for an accounting period. |
| Expense | |
| Expense is deducted from the income. | Expense is not deducted. |
| Recording in Income Statement | |
| This is recorded on the top line in the Income Statement. | This is recorded on the bottom line in the Income Statement. |
Summary – Earnings vs Revenue
In conclusion, both earnings and revenue are crucial for a company, although one may be considered more important that the other during certain times depending on the company strategy. The main difference between earnings and revenue is that earning is the total difference between income and expenses for a period of time, whereas revenue is the total income that a company generates through trading products and services.
Since these two aspects represent key financial indicators of the company, decision makers of the company always consider them before taking important decisions. Therefore, it is vital to ensure that both earnings and revenues grow at a steady pace year on year.
Reference:
“Differences Between EBIT and Profit Before Taxes.” Differences Between EBIT and Profit Before Taxes | Chron.com. N.p., n.d. Web. 06 Feb. 2017.
Oakley, Tom. “Coca-Cola: Ansoff Matrix.” The Marketing Agenda. N.p., 28 Mar. 2015. Web. 06 Feb. 2017.
“Market Share-a Key to Profitability.” Harvard Business Review. N.p., 01 Aug. 2014. Web. 06 Feb. 2017.
Image Courtesy:
“Google Play daily app revenue” by Intel Free Press –(CC BY-SA 2.0) via Commons Wikimedia