For any decision in which it balances projected revenue against projected expenses, each company makes a simple calculation. This is a part of the corporate cycle so basic that it sometimes goes unnoticed. This does not alter the value of this measure, however. Understanding the revenue-expenditure relationship will take you a long way to understand how business works.
Revenue from a company can be described as the amount of money that it brings in from sales of a product or service. Revenues from a company will fluctuate greatly over any time period depending on the demand for its product or service. For this purpose, choosing a particular time interval to calculate revenues is essential. Companies frequently prepare annual revenue reports measuring their total revenue for a year but management accounts use a shorter time period.
Revenue also has crucial psychological implications for your business, both internally and externally. Employees want to feel trust in their employer and feel safe and secure at work as they will be paid. This feeling of ease provides a high-results oriented focus for employees. Revenues offer business partners, providers, community members, and other stakeholders affected by your business comfort. More stakeholder trust makes them more likely to take risks and make decisions that will help your company.
Expenditures within a company can be defined as any costs it may incur, such as infrastructure or payroll. Expenditures can most frequently fluctuate over any period of time but are often under a company's direct control. Expenditures can be reduced by making cuts in one or more areas. The majority of businesses aim to align expenses with revenue such that costs stay within range and are not higher than revenues thus resulting in a profit.
Revenues vs. Profit
Many businesses are judged by revenue rather than profit; for example, a start-up on the Internet can show high revenue even in the early stages of the business but usually spends much more money on expansion and marketing than total revenue. This can only be done if the investor can provide added capital – the term investment money that is given to the company – that enables him to spend more money than he earns. A business that needs continuous investment will fail in the long run; only a profitable company will be able to pay back its investors. However, often an entrepreneur will be able to prosper financially if he can sell his company when it is unprofitable when investors feel that the likelihood of future profitability is strong. In most cases, only profitable enterprises can be sold to new owners at reasonable prices.
● Cost Reduction
Anything that a business spends money on is an expense, and by reducing costs, many companies aim to increase their profitability. There are several smart ways to do this; for example, by opening additional stores, a retail company may grow, or take the much cheaper option of starting an online business to supplement its brick-and-mortar business. However, specific strategies of cost-cutting can benefit the business: pay too little to your workers or cut too much of your payroll, and you will be unable to deliver enough revenue to produce potential profits.
● Profit Measurement
Anything that a business spends money on is an expense, and by reducing costs, many companies aim to increase their profitability. There are several smart ways to do this; for example, by opening additional stores, a retail company may grow, or take the much cheaper option of starting an online business to supplement its brick-and-mortar business.
Profit is measured by subtracting expenses from the revenue, when accounting for the profitability of a company it is important to use management accounts such that the expenses are attributed to the same period as the period in which the revenue was earned, not paid. this is different to annual tax accounting where the point at which the cash is received and paid out is used to determine the tax liability on profit for the year.