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Is revenue the same as profit? I bet you sit down and ponder that question quite often.
Oh, you don’t? Well, as a salesperson, you probably should think about that because, no, they aren’t the same, but they’re both crucial metrics to track to understand sales performance, forecast effectively, and spend wisely.
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Here, we’ll take a closer look at the difference between revenue and profit, why it matters in sales, and how to get from revenue to profit.
Table of Contents
- What is the difference between profit and revenue?
- Why does revenue vs. profit matter to salespeople?
- How to Get From Revenue to Profit
- Revenue vs. Profit Example
What is the difference between profit and revenue?
Revenue is the total income a business generates through its sales. Profit is the portion of that income that remains after subtracting that company's operating costs, debts, taxes, and any other expenses it incurs in the interest of generating revenue.
Revenue is a top-line number on financial statements, and sales teams are often measured against it. When you close a $100,000 deal, that entire amount counts towards the overall revenue figure. Profit is the bottom line that ultimately determines a company’s financial health, and you get the final number after all costs are subtracted from total revenue (more on this process here).
Factors Impacting Revenue and Profit
There are various factors that impact revenue and profit numbers, including demand (increased vs. lowered), pricing (higher price points can turn buyers away), competition, and economic conditions. Sales-specific factors that impact revenue include:
- Deal size: larger deals equals more revenue
- Sales volume: more deals means more revenue
- Pricing strategy: higher prices mean more revenue per deal
- Discounting practices: more discounting reduces revenue
- Upselling and cross-selling: additional products/services boosts revenue
- Retention: renewals impact recurring revenue
- Contract terms: multi-year deals can increase total contract value
Everything that influences revenue will influence profit, but there are additional factors that come into play once you have your revenue numbers. For example, higher operational costs or increased tax and interest rates will all impact final profit numbers. Sales-specific activities that impact profits include:
- Product/service mix: some offers have higher margins
- Sales cycle length: longer sales cycles increase acquisition costs
- Customer acquisition cost: higher CAC reduces profit
- Sales compensation: commission structure impacts profitability
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Why does revenue vs. profit matter to salespeople?
As a salesperson, having a clear understanding of the difference between revenue and profit is essential because it helps you be strategic. For example:
- You learn to prioritize deals with the best profit potential, not just high-ticket revenue numbers.
- You understand how to negotiate strategically because any concessions you make will impact the bottom line (profit).
- It helps you learn to qualify effectively and choose clients with lower acquisition and servicing costs, AKA the clients that cost you less.
- It helps you streamline your sales process because shorter sales cycles mean lower associated cycle costs.
How to Get From Revenue to Profit
You can’t get your final profit number without revenue, but there are a few subtractions along the way. Let’s follow the money from the moment you close a deal to see how revenue transforms into profit.
I’ll go through the steps based on an imaginary deal we just closed with a $500,000 ticket price (yay, go us!). I recommend downloading HubSpot’s free profit & loss statement template because it’ll help you contextualize where these numbers would go on an income statement and why it’s important to go through every single step.
Download the free template here.
Starting With Gross Sales
Gross sales are the most fundamental measure of income, without accounting for allowances, discounts, and returns. Although it is a type of revenue, it doesn’t accurately reflect a business’s income and usually isn’t listed on an income statement.
In this case, our gross sales are $500K.
Getting from Gross Sales to Net Sales (Revenue)
Net sales is a more practical reflection of overall revenue, and it accounts for all the sales a company makes in addition to three key factors that can reduce the initial sale amount:
- Allowances: Retroactive discounts a buyer receives after they discover and report some sort of defect with a product. For our example, let’s say we issue our imaginary client a $15,000 credit (allowance).
- Discounts: Price reductions a seller might offer a buyer in exchange for immediate or early payment. Since our client signed a multi-year contract, they get a 5% ($25K) discount on the $500K.
- Returns: Partial or full refunds buyers receive for sending a product back to a buyer. Lets say our client isn’t fully satisfied, so we issue a $20K refund.
Accounting for those three adjustments, I now have a clearer picture of our deal's actual revenue (net sale): $440,000 ($500,000 - $60,000 in total deductions). If you’re following along with our profit & loss statement template, $440K is what you’d record in the cell next to Sales.
$60K is a rather hefty deduction, which emphasizes the importance of contract negotiations for sales teams when closing deals.
Check out this article for more information on the difference between gross and net sales.
Getting from Net Sales to Gross Profit
Gross profit comes after net sales, and you get it by subtracting the cost of goods sold (COGS), which are costs directly associated with the production of what we’ve sold (raw materials, labor, etc.) from net sales.
If it costs $150,000 in direct expenses of production, our gross profit would be $290,000 ($440,000 - $150,000).
Getting from Gross Profit to Earnings Before Interest and Taxes (EBIT)
We whittle our gross profit ($290K) down to earnings before interest and taxes (EBIT), also known as operating profit, by subtracting any operating expenses.
These expenses are any costs associated with the resources needed to stay in operation, like commission, marketing costs from generating the lead, sales team overhead, customer success resources, administrative expenses, rent, legal fees, etc.
If these expenses amount to $100K, the operating profit (EBIT) for our deal would be $190,000 ($290K - $100K).
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Getting from EBIT to Net Profit
Net profit; the true bottom-line impact of the deal we just closed. We find net profit by subtracting the value of any interest and taxes on earnings.
So, if taxes and interest account for 15% of EBIT, the net profit for our $500,000 deal is $161,500 ($190K - $28,500).
Revenue vs. Profit Example
Just to make sure it’s clear, let’s go over another example of how to calculate revenue and profit.
Starting With Gross Sales
Let's say a manufacturer moved 5,000 orders of 1,000 units at $1 per unit in the past fiscal year. In that case, the company's gross sales would be $5,000,000.
Getting from Gross Sales to Net Sales
Now, let's imagine that of those 5,000 orders, 100 buyers reported defects and each received an allowance of $0.15 per unit. Another 100 received a discount of $.05 per unit for paying for their order in full upon their initial purchase. And another 100 returned their purchase for a $0.50 per unit refund. That would mean the company would have to account for:
- $15,000 in allowances
- $5,000 in discounts
- $50,000 in returns
Taken together, those deductions would chip into the company's gross sales by $70,000 — leading to a net sales (or revenue) figure of $4,930,000. Alternatively, if you're already using revenue intelligence software, you could skip the past steps and move directly to gross profit.
Getting from Net Sales to Gross Profit
From there, the company would subtract its COGS from its net sales to get its gross profit. Let's say it takes $0.25 in raw materials and labor costs for the company to produce each individual tennis ball — so the COGS for the 5,000 shipments the manufacturer moved would amount to roughly $1,250,000. That would make the company's gross profit $3,680,000.
Getting from Gross Profit to Earnings Before Interest and Taxes (EBIT)
Once the manufacturer has its gross profit, it would find its earnings before EBIT by subtracting its operating costs. Let's say the company spends $2,500,000 annually on employees' salaries, $200,000 annually on rent for its facilities, $100,000 on its marketing efforts, $15,000 in accounting fees, and $10,000 on travel expenses for its salespeople.
Assuming that's all it takes to keep the business operational, its operating costs would be $2,825,000. That would make the company's EBIT $855,000.
Getting from EBIT to Net Profit
Once its earnings before interest and taxes have been established, the company would find its net profit by (you guessed it) subtracting the interest and taxes it pays.
Let's say those fees amount to 35% of the company's income. That means the business would pay $299,250 in interest in taxes — making its net profit $555,750.
As you can see, there's a pretty sizable gap between the company's revenue ($4,930,000) and its net profit ($555,750).
Over to You
It’s important to grasp the distinction between revenue and profit because they have different practical applications and implications for a business's overall health.
By understanding how your sales activities impact revenue and profit, you build yourself up as someone who hits quota and drives sustainable business growth.
Free Financial Planning Templates
Manage your business and personal finances with these five financial planning templates.
- Balance Sheet Template
- Profit & Loss Statement Template
- Financial Projection Template
- And More!
Download Free
All fields are required.
