Revenue VS EarningsDifferences & comparison of the two

Before a business earns a profit, it has to earn revenue first.

To earn revenue, a business will have to successfully sell its product offerings.

It could be goods, services, or both. Whatever money the business receives  (both at the time of sale and at a later date) from the sales of its products will form part of its revenue.

This means that whether a business makes a cash or credit sale, it will still earn revenue.

Now, since the business earns its revenue, it should be alright to refer to it as the business’s earnings too, right?

Well, apparently not.

As it turns out, earnings typically refer to another metric of financial performance.

It is true though that both revenue and earnings are terms that businesses use to describe their financial performance for a certain period.

So yeah, there’s a good excuse for confusing the two terms.

To address this confusion, let’s learn what are the differences between revenue and earnings.

What is revenue?

What are earnings?

Are they both important for a business?

Is one more important than the other?

Do they both appear on a business’s financial statements?

We will try to answer these questions as we go along with the article.

What is Revenue?

Revenue refers to the amount of money that a business earns from the sale of its products (goods and/or services).

It accounts for both cash and credit sales.

It does not account for any costs and expenses unlike the other measures of profitability.

Revenue is just the raw amount that the business makes from the sale of its products.

For example, if a business earns a total of $100,000 from the sale of its goods, then that amount is its revenue.

Revenue represents the business’s ability to earn from its core operations.

It focuses on the sale of its products. Revenue is also the main source of funds that pays for a business’s operations.

As such, it’s important for a business to earn revenue to maintain its operations.

Revenue appears on one of the financial statements, specifically the income statement.

There, it typically appears as the first line item, which is why it is also referred to as the top line.

From there, costs and expenses are deducted to arrive at other significant measures of profitability such as gross profit, operating profit, and net profit.

Revenue only typically includes what the business earns from its main operations.

Income that comes from non-operating sources appears on the income statement as a different line item.

Businesses and analysts often use revenue and sales interchangeably.

What are Earnings?

Earnings refer to the profits that the business earns.

So when investors and analysts speak of a business’s earnings, they typically refer to its net income.

Earnings or net income is what the business earns after accounting for all costs and expenses including cost of sales, operating expenses, non-operating expenses, losses, and taxes.

This is typically the amount that is available for dividend distribution.

If costs and expenses exceed the business revenue, it will have negative earnings (a.k.a. losses).

Earnings provide an idea of the business’s efficiency.

It shows us how much of the revenue the business retains after accounting for all expenses.

The higher the earnings relative to revenue, the more efficient the business is in generating income.

Earnings appear as net income on one of the financial statements, specifically the income statement.

It typically appears as the last line item, which is why it’s also referred to as the bottom line.

It represents how much of the revenue is retained after accounting for costs and expenses (including taxes).

Many analysts use the earnings figure to calculate several financial ratios such as EPS (earnings per share), net margin, etc.

Revenue vs Earnings

Now that we have an understanding of both revenue and earnings, it’s time to compare.

Let’s first address their appearance on the financial statements.

Both revenue and earnings appear on the income statement.

Revenue appears as the first line item, which is why we also refer to it as the top line.

The calculation of other profitability measures starts from the revenue.

On the other hand, earnings appear as the last line item.

This is why we also refer to it as the bottom line.

We arrive at it after deducting all costs and expenses from the revenue.

Revenue represents how much the business earns before accounting for any costs and expenses.

It represents the raw amount that the business earns from the sale of its products.

On the other hand, earnings represent how much of the revenue is left after accounting for all costs and expenses.

Earnings represent the profits that the business earns within a certain period.

Revenue is a measure of the business’s ability to generate income.

While earnings can be that too, it’s mainly a measure of the business’s efficiency.

The higher the earnings relative to revenue, the more efficient the business is.

Revenue typically only accounts for the business earnings from its main operations.

It does not include income from non-operating sources such as investment income.

Earnings account for such income as it accounts for all income (including revenue) and expenses.

Both revenue and earnings are important. They represent different aspects of a business’s financial well-being.

Each may be more useful for certain purposes.

However, it is always recommended to not only rely on one of the two but rather both of them.

When Earnings are Higher Than Revenue

Typically, a business’s revenue will be higher than its earnings.

This is because earnings account for costs and expenses while revenue doesn’t.

However, earnings also account for income that revenue doesn’t.

That’s why in some cases, a business’s earnings can be higher than its revenue.

This occurs when the business earns enough income for non-operating sources to exceed its revenue even after accounting for all costs and expenses.

Conclusion

It’s important to look at both revenue and earnings.

Revenue may be an indicator of the business’s ability to generate income, but it isn’t always an accurate representation of profitability.

This is because it does not usually for income that does not from operations.

Meanwhile, earnings may represent a business’s profitability but it isn’t always an accurate representation of its operations.

It may include income from non-regular and/or one-time transactions, which can temporarily inflate the profitability of the business.