Revenue vs. Net Income

Company performance reports often emphasize revenue. Net income typically appears later in the report. Knowing the difference between revenue and net income is incredibly important.

Revenue: This is the total amount of money that the company recorded during a specific time period. The time period is typically monthly, quarterly, or annually.

For example, the fictitious company Red Lunchboxes, has one product, red lunchboxes. They sold 1000 red lunchboxes this quarter at a price of $10 per red lunchbox. Their revenue would be:

Total Revenue = Number of red lunchboxes sold x Price per red lunchbox.

Total Revenue = 1000 red lunchboxes x $10 per red lunchbox = $10,000.

Net Income: This is the amount of money remaining after subtracting all the costs from revenue. The time period is also typically monthly, quarterly, or annually.

To calculate net income, Red Lunchboxes must subtract all their expenses from revenue.

Red Lunchboxes quarterly expenses include:

A. Rent: $2,000

B. Salaries: $4,000

C. Materials: $4,000

Total Costs = $2,000 + $4,000 + $5,000 = $10,000.

Net Income = Total Revenue – Total Costs = $10,000 - $10,000 = 0.

For this quarter, Red Lunchboxes had a net income of 0. Thus, despite impressive revenue, the Red Lunchbox company made no money this quarter.

There is nothing inherently wrong with a net income of zero or a net loss. A company may have zero or negative net income for many reasons. The company could be a startup and have only recently introduced their product to the market. The company could be investing heavily in expansion, new product development, or maintenance.

The key is to not be misled by the revenue. High revenue can be enticing and can lead an investor to neglect lack of income.

For brevity and clarity, this article lacked discussion of actual cash flow. Cash flows will be discussed in a future article. Investors should be aware that net income is not the same as cash inflow. A company can have a positive net income without any cash inflow. The astute investor will review all financial statements, including the statement of cash flows.

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