Why it’s important to understand the difference between revenue and income
Walmart’s profit for the year actually corresponds roughly to their historical revenue vs. income relationship (the year before the company's income was $9.86 billion from $500 billion revenue). Nevertheless, their gap of revenue to income illustrates that, even for huge companies, the two concepts are not easily interchangeable.
Understanding the relationship between your company's revenue and income allows you to gauge progress, build up tools for analyzing where your processes can be improved, and develop a true picture of the health of your operations.
Knowing how to track revenue and income separately is key to producing an accurate financial statement.
For the top line, ensure that all revenue streams have been accounted for, including any direct investment into the company since the release of your last statement.
For gross income, ensure your accounting team has a grasp of the different areas of expense. A detailed loss statement can spell out selling, general and administrative (SG&A) costs often form the bulk of the expense for SaaS companies. Cost of goods and vendor fees are likely to play a part too.
It all contributes to the bottom line. If your revenue vs. income relationship is looking particularly unhealthy, you may need to consider expanding your statement reporting to include a line-by-line review of all SG&A expenses to look for ways in which those expenses can be reduced. Making reductions on seemingly marginal expenses (i.e., the expensive, brand-new 20-person office your six-person team just moved into) may not seem like difference makers, but cumulative cutbacks can improve your company’s outlook.
An accurate understanding of the revenue vs. income dynamic makes representative financial reporting possible. This is fundamental to your ability to analyze processes in your company that could be harming your bottom line.
You cannot possibly make representative month-on-month forecasts of your business without a sound grasp of how revenue breaks down to income on your balance sheet. When doing your own internal reporting, accurate numbers allow you to build estimations of next month’s revenue/income based on the relationship as it stands now and how the relationship will be affected by external factors (increase in demand, improved vendor relationships leading to lower supply costs, future increase in costs of providing service, etc.).
Beyond month-on-month forecasting, a revenue-oriented approach to a company's financial reporting won’t tell you much about your company’s long-term outlook. Basing reporting on net income, incorporating an understanding of the cost of goods sold (COGS), etc., will show you how to adapt your approach to remain competitive in the market and how to use your revenue to drive real growth.
This is what the financial reporting for a SaaS company in good health might look like. Their SG&A is under control (no need to break it out into individual expenses), vendor fees are constant, and the company has a good chance of seeing more improvement in its next month.