Net Income Vs. Revenue
By Kyle Smith, CPA
What matters the most, Net Income or Revenue?
Any Financial measurement or metric should be to help you as the business owner (or unit manager) do one thing: make better decisions. Revenue and Net Income are two of the best known and most used measurements used by every business. Which one matters the most, aka helps you make better business decisions? Below I’ll make a case for both and tell you which one I believe matters the most.
The Case for Revenue
Revenue is your “top line” sales (revenue is the top line of a Profit & Loss Statement), and it’s the first thing considered when looking at company financial results including company profits. It seems like a very clear indicator of success: If revenue goes up from the previous period, you win, yay! If revenue goes down, you lose. And while the change in revenue is critical, WHY the revenue changed and WHETHER the revenue met expectations can be even more critical. For instance, perhaps revenue goes up from the previous period, but the increase was driven by a product or service that you now expect will face a supply or labor shortage issue. Or, maybe revenue decreased from the previous period, but as a seasonal business, it actually decreased less than was forecasted, meaning the revenue outperformed expectation. These examples illustrate the power of revenue as both a high-level category for quick review and a line on the P&L for detailed analysis.
The Case for Net Income
Net Income (NI) is equal to your “bottom line” results, taking revenue and subtracting all business operating expenses to arrive at a net number. Just like revenue, a high-level Net Income can provide a quick gauge of month-to-month success. If Net Income is higher now than the previous period, the business is more profitable (and vice versa). However, digging into WHY Net Income goes up or down each period is critical, as ending up with more bottom line Income is not necessarily a guarantee of success. For instance, you may finish with higher NI in the current period than last, but you have RELATIVELY less NI in terms of a % of higher sales (your bottom line NI % went down). This is caused by selling less profitable per unit services or products, potentially affecting long-term growth. Also, you may have more NI and have a higher NI % (of sales) compared to a previous period, but you may have achieved these gains by you or your employees logging unsustainably high hours. Once again, digging into NI beyond the highest level of looking at absolute gain or loss is critical to answering why, and making sure the business is aligned with your vision for success. matters the most because it indicates whether a business can survive and thrive.
And the winner is…
Both Revenue and Net Income are essential metrics to focus on because of their versatility and importance in determining business success. However, ultimately I believe Net Income matters the most because it indicates whether a business can survive and thrive in the long run. You can have all the revenue in the world, but if you are not profitable or do not have a course towards bottom-line positive Net Income then there is no path to business survival.