No, it’s not a trick question!
While most of us think we know the difference between the two concepts, do we? And do we realize how confusing the terms might affect our bottom line?
Because frequently, the two terms get used interchangeably. People mix them up and use them without qualifying what they represent!
And it’s not just business owners. You’ll find the same written in articles, books, and across the web.
While some may not care about using the correct terminology, others may not realize the fundamental difference between the two.
But the words we use to express our thoughts and ideas matter! Ultimately, using the right words helps us communicate better and run our businesses more effectively.
Here’s an example of what I mean.
Income claims for every type of industry are all across the web.
Let say you come across this statement: “Their practice made over $100,000 in the last quarter alone.”
But what are we talking about here? Are we talking about income or profit?
Because looking at the number alone, without knowing what it represents, doesn’t tell us anything! While a business may generate $100,000 in revenue, it doesn’t guarantee it’s profitable.
And here’s the problem. Some talk about income as if it was profit, and use the word profit when referring to income or revenue.
But income or revenue is not the same as profit. Not by a long shot!
And if you don’t understand or pay attention to the difference between the two, sooner or later, it will come back to bite you.
So, let’s talk about income and profit, and why the difference between the two is crucial in business.
We’ll use the basic income statement to help us demonstrate the point. For one, it’s where the numbers come from and two, it’s a visual to help us understand the difference between the two.
Example Income Statement
Below is a bare-bones income statement. For our purposes, we show the three big categories only: revenue, expenses, and profit/loss.
Here’s how the income statement works.
Take the sum of all revenue, aka income from your business, subtract all expenses, and what’s left on the last line is either a profit or a loss.
Profit or loss is what’s left-over after all expenses were paid. If there’s a profit, it’s what you can put in your pocket and take home.
But if the business shows a loss… well, that’s a different story altogether.
Now let’s take a closer look at the three categories:
Is the total amount of products sold, services provided, and other income generated by the business for the reporting period (i.e., office visits, labs, office sublet, product sales, consulting, etc.)
= Total Revenue or Gross Income or Gross profit for the period
The total amount of variable, fixed, and miscellaneous expenses incurred operating the business to generate the total revenue (i.e., rent, salaries & wages, supplies, utilities, marketing, loan service, interest expense, taxes, etc.)
= Total Expenses for the period
#3 Revenue – Expenses:
= Net Profit/Loss for the period
And this is where it gets confusing!
The top line of the income statement lists the total revenue generated by the business for the reporting period. Some also refer to it as income.
The last line of the income statement is net profit/loss. It’s also called the bottom line because it’s the last line and refers to what’s left-over after all expenses were paid.
Often, people use the term income or profit, regardless if they’re talking about the top or the bottom line, and that’s what’s confusing.
While some may think this distinction is akin to splitting hair, I don’t think so.
Let’s assume a business generates $100K for the quarter.
Again, if we don’t know what the number represents, showing $100K on the top line is very different from $100K on the bottom line, would you agree?
While the business may have generated $100K in total revenue, depending on outstanding obligations and expenses, it may still end up recording a loss.
And that’s just one of the reasons why it’s essential to distinguish between income vs. profit in how you think and communicate.
When you do…
- You will find it easier to talk with your bookkeeper, accountant, and other financial professionals because both of you will be on the same page.
- You may find it easier to discuss financial topics with your staff; you’ll bring greater clarity, understanding, and direction to the table.
- If you work alone, you’ll find it easier to make sense when reading your financial reports.
- When you apply for a loan, you’ll be able to present and discuss the financials of your business with greater clarity.
- You’ll gain a deeper understanding of your business, including the finances and operations.
- You’ll be in a position to better manage your cashflow.
- And finally, you’ll be positioned to run and grow your business more efficiently and effectively.
Income or revenue tells us how much a business brought in during a given period. However, the number alone doesn’t tell us if the company is profitable.
But the word profit provides us with more information. It tells us about the profitability of the business.
The words we choose matter!
So make it a point to differentiate between income and profit. Don’t confuse their meaning and use, but use the correct terms whenever necessary. When you do, you bring clarity and understanding to the table,
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By Johanna Hofmann, MBA, LAc; regular contributor to the NPBusiness blog and author of “Smart Business Planning for Clinicians.”