by Sam Franklin | September 06, 2022 | 14 min read
Revenue vs. income: A guide for your eCommerce or SaaS businessGet funded
Last updated: October 06, 2022
When running a software as a service (SaaS) business, selling recurring subscriptions is the core element that generates capital for your company. Whether you’re providing a monthly service that helps clients or a platform that they integrate into their day-to-day activities, if you want to keep money flowing, you need to keep subscriptions high.
Many business owners tend to focus on the subscription portion of their business. Considering this industry has grown 5x since 2015, it’s no wonder that keeping subscriptions high in an increasingly competitive market is a priority. But, as a business owner, the number of subscriptions your company is actively profiting from isn’t the only thing you should be paying attention to.
Two core metrics, revenue and income, are equally as important to track as an overall number of subscriptions. While often confused or considered the same thing, revenue and income are actually completely different and require different mathematics to track. In this article, we’ll move through all things revenue and income, demonstrating exactly what you need to know when tracking these metrics.
Let’s get right into it.
Table of contents
- What is the difference between revenue and income?
- Other metrics you should keep an eye on
- How to calculate revenue and income
- Revenue vs income example
- Revenue vs income FAQ
- Key takeaways
What is the difference between revenue and income?
Although both income and revenue deal with financial data and money in general, they are not the same metric and cannot be considered as much. But, considering that they use the same unit and have similar methods to work these metrics out, they are often confused.
Let’s quickly move through the main definition of each of these terms, explaining what each entails.
When working out revenue, you need to calculate the total income generated by your business activities. When refining this for a SaaS business, it typically means that the total amount generated by all of your subscriptions is recurring.
Typically, revenue is understood as what is known as ‘top line’ or ‘gross sales’ metrics, with this being financial documentation of everything that’s coming into a business. Revenue is the first factor businesses will calculate, as further statistics can be concluded from there.
There are several ways to calculate revenue within SaaS businesses due to the different payment structures that a company can rely on. SaaS businesses often offer monthly, quarterly, or annual billing cycles. If your business offers more than one method of billing clients, you’ll have a lot more flexibility when calculating your total revenue.
For example, if you’re only interested in the monthly revenue earned, then you could calculate monthly recurring revenue. From there, you could also extrapolate the data to an annual recurring revenue figure or simply run the calculations for the year as a whole.
The latter option is especially useful if you tend to have above-average churn, as there would be a lack of consistency within your month-to-month revenue figures that would skew the yearly data. If you want to understand your company's revenue over a certain period, it’s always better to look at that specific space of time instead of using any extrapolation.
Income, on the other hand, is about the total profit your business generates after taking away any expenses from the equation. Often referred to as the company’s bottom line, this is the real figure about how much your company generates after all business expenses are considered. This figure is much more important as it will allow you to plan a future budget plan, with your net profit helping you to understand more about the total amount of money your business is creating for you.
When discussing income, you typically do revenue minus expenses, although we’ll discuss this later. If you’re wondering what sort of operating expenses would count within this equation for a SaaS company, it could be things like paying your staff to develop features, paying for your office space, any further labour costs, utilities, or any other factor which you must pay for to continue selling your SaaS product.
Operating costs vary tremendously between different businesses but are typically slightly lower for SaaS businesses. This is mainly due to the fact that one of the main operating costs within other industries is the cost of manufacturing the products that a company is selling. As SaaS is distributed digitally and exists in a virtual space, this cost isn’t factored in.
Other metrics you should keep an eye on
While these two financial metrics are certainly important to keep an eye on, as they’ll directly tell you how much money is coming into the business and how much is actually on the positive side, these are not the only things you should be paying attention to.
When calculating financial information, there are three important metrics to follow:
Operating Expenses & EBIT
Each of these informs the above metrics and will help you to get a complete picture of your company’s financial health.
Many people believe that profit and income are the same as they’re focusing on the financial statement after operating revenue has already been considered. While they are very similar, one core difference sets them apart; profit is the difference between the amount you spend and earn in a time period, while income is the actual amount of money earned over a period.
These figures would then be put to use by a company in different ways. For example, on a profit and loss statement, the total profit would reveal how much cash flow is disposable to the company against how much they’re spending. Alternatively, the income figure would demonstrate the amount of money a company can put to use for future growth.
Focusing only on profit and what’s currently in the account means that you could overlook some other expenses that are going to automatically occur later in the month. It’s important to understand both of these metrics to better plan for the future and make smart decisions that contribute to your company’s financial health.
If you’re looking for an easy way to generate profit figures, use our profit margin calculator.
Cost of Goods Sold (COGS) is a metric that doesn’t have as much in SaaS, but one that you should still aim to stay on top of. Although there isn’t a physical product to develop within SaaS, many factors still feed into COGS that need attention.
The final COGS figure reflects a company's direct costs when selling a product. While people tend to consider this only applying to the product’s creation, it also extends into indirect costs like marketing for the product or sales strategy implementation. The cost of goods sold, then, is more about looking at all the indirect costs that could be impacting your bottom line. All the expenses you incur from product development will fall into this category, meaning you need to take this number away from your revenue as a step toward calculating income.
While often overlooked within SaaS, tracking your cost of goods sold is vital.
Operating Expenses & EBIT
After calculating the top line of your business, there are still a few factors you need to consider before working your way down and finding the exact company’s income generated by their SaaS products. Alongside operating expenses, which at this point would cover any other expenses that haven’t been included in product creation, you’re able to find the EBIT number.
EBIT, or Earnings Before Interest and Taxes, is revenue minus expenses, without including tax or interest in the figure. This figure reflects the company’s net income before taxes or any other interest expenses.
This figure is vital for the company’s financial reporting, as it is typically considered one of the leading factors when calculating a company’s profitability. This metric is also sometimes known as operating income since it reflects the amount of money your company is actively generating through its business.
Apart from taxes, this sum is the gross profit you’ll be creating.
How to calculate revenue and income
Now we understand the difference between these two metrics, let’s turn to how we can calculate them both. Each of these final figures will give you insight into your company’s financial position, allowing you to make smarter, high-impact decisions.
Let’s move into the formulas:
To calculate revenue = Price of product or service x quantity sold.
To calculate income = Revenue - cost of goods sold - expenses.
Remember that while revenue should always be positive (as long as you sell a singular subscription), income could be negative if you spend more than you’re earning.
Revenue vs income example
Now we understand how to calculate these two figures, let’s break them down with some examples. With a SaaS business, you’ll be selling subscriptions to your product. This considered, we’re going to be looking at one month, with all of the maths in this example focusing on calculating the revenue and income gained by a company in that singular month.
To find out revenue and income, a SaaS company needs to know several things:
How much they charge per subscription
How many subscriptions they sold that month
The total amount of all expenses (salaries, marketing budget, etc.)
With these three figures, a company can calculate both revenue and income. Let’s take company A, which documented the following figures:
Charge per subscription - $10
Total subscriptions that month - 1,000
Total expenses - $2,000
With these numbers down, the company can calculate their net revenue. To do this, they would multiply the number of subscriptions they sold (1,000) by how much each one cost. As this company only has one band of subscription, this is a fairly easy sum of 1000 x 10 = 10,000. Therefore, this company’s revenue is $10,000 for this given month.
From there, we can deduct all of their expenses to find the income, doing 10000 - 2000 = $8000. This company’s total profit for the month is $8,000. Then the company can use this figure to plan for the future. Perhaps they’ll use this $8,000 to increase their marketing budget, bring on another employee, or refine their product offering.
With these figures jotted down, the business will have all their maths in order to go forward with a good business sense. You can collect all of these in one place using our income statement template sheet.
Revenue vs income FAQ
Even after the difference between revenue and income has been explained, people tend to have a range of questions they’re still not quite sure of. To ensure we’ve covered all of the bases, we’ll quickly move through some of the most commonly asked FAQs regarding these metrics.
What is net revenue vs net income?
When including the word ‘net’ in any finance figure, it often means that you need to subtract any other expenses from the total. But, considering revenue doesn't count expenses, how exactly can there be a net revenue?
With net revenue, the expenses you’re misusing are not those involved in product development, promotion, marketing, and distribution but rather those connected to the sales process itself. For example, to find net revenue, you could minus any discounts you’ve offered that month or any returns that have come in. With this, you’ll quickly see the difference between your total revenue and any potential losses due to any sales-related expenses.
For example, if you sell $10,000 worth of your SaaS platform, but you were running a discount the entire month that was 20% off, then you’d have a total revenue of $8,000. This would be the net revenue that you can then take forward.
Net income, on the other hand, is less commonly mentioned as it is exactly the same as income. As income is calculated by subtracting the expenses from the revenue generated during that period, you’re already doing the action that makes this a ‘net’ figure. Therefore, you can use net income and income interchangeably, just as long as you calculate it properly and remove any expenses.
What is operating revenue?
Operating revenue is all of the money that a company generates while doing its primary form of business. Within a SaaS company, the operating revenue would be the total amount generated from all of the subscription business done that month. This is then reflected on the financial statement as a top-line figure.
While your SaaS business may offer other services, your operating revenue will simply encompass your whole business if the only money generated is through subscriptions.
What is accrued revenue?
When discussing accrued revenue, you can think of it as money that customers owe to a company. For example, with many SaaS products, you can sign up for a service but may not have to pay until you’ve used it for a week or even a month. With this, the accrued revenue is the total amount of money owed to the company that hasn’t been paid yet.
The key differences between accrued revenue and revenue are the time when the money is tracked and the location of the moment in that moment. Accrued revenue considers a payment made as soon as it is purchased, even if the money hasn’t yet been transferred. Revenue, on the other hand, only looks at money that’s arrived into the business accounts.
What is the difference between operating profit and net income?
On a company’s income statement, you’ll most likely find figures for both operating profit and net income. Although they both express how profitable a company is, focusing on the generation of money, they don’t describe exactly the same figures.
Operating profit demonstrates the company’s income earned apart from taxes. This is the amount the company is generating that they actually get to keep after they pay off all other expenses.
On the other hand, net income demonstrates the total revenue minus all of the expenses generated in the period.
Can income be higher than revenue?
No. Income can never be higher than revenue because income is calculated by taking the revenue and then subtracting the expenses. Even if there were no expenses (which is most likely impossible), the maximum the income could be is equal to the revenue.
Is revenue or income more important?
Revenue and income are two of the most important metrics that you’ll find on a company’s balance sheet. While revenue dictates all the money they generate, income further considers how much that company is spending. With that considered, income is much more important than revenue at the end of the day.
A positive revenue of $1,000,000 a year looks fantastic until you consider the $1,200,000 expenses that the company spent that year. With this scenario, the income would be -$200,000, which is a much more telling figure.
As income has more information, it is typically the more important figure. That said, you cannot increase income without also increasing revenue, so you cannot overlook revenue either.
While statements like gross profit, operating profit, net revenue, and total revenue are often thrown around as if they all meant the same thing, this is rarely the case. Even outside of accounting spheres, business owners need to know the difference between their top line and bottom line figures on their financial statement, as it helps to give a better idea of how a company is doing financially.
When focusing on revenue and income, the first represents all the money collected by a company, while the latter represents the final figure after all expenses are taken out. Therefore, the difference between revenue and income comes back to when you look at the figures, with the former being the first figure you’ll find, and the latter being the final one on your finance sheet.
Keeping these definitions in mind, calculating total revenue, understanding net income, and calculating gross income are all vital for business owners. With the tips and equations in this article, you’ll be well on your way to becoming a pro in this area of business finance.
Sam founded his first startup back in 2010 and has since been building startups in the Content Marketing, SEO, eCommerce and SaaS verticals. Sam is a generalist with deep knowledge of lead generation and scaling acquisition and sales.