Revenues, Expenses, and
Profits
Three related concepts are key to the running of any
business:
-
Revenues. Revenues (also
called sales) are the dollars you generate by
selling your products. There are two types of revenues: gross revenues and net
revenues. Gross revenues are the straight sales
dollars you record; net revenues are your sales
dollars less any returned or discounted sales. Revenues never have any costs or
expenses deducted. They're pure sales; nothing else is included.
-
Expenses. Expenses are your costs, the money you have to pay for
various goods and services. There are several different types of expenses. Cost of goods sold (COGS) are product costs directly
associated with the manufacture or purchase of the goods that contribute to your
revenues. Operating expenses are those nonproduct
costs that reflect the day-to-day operations of your businesssupplies, salaries,
rent, and so on. COGS and operating expenses are typically reported in different
parts of your income statement.
-
Profits. If revenues reflect
how much money you take in and expenses reflect how much money you pay out,
profits reflect how much money you have left after the two previous activities.
(Profit is often referred to as income or earnings.)
Note
Costs can be either fixed or
variable. Fixed costs are typically those
operating expenses that you have to pay no matter how many (or how few) products
you sell; your monthly Internet bill is a good example of a fixed cost. Variable
costs are those costs that vary depending on your revenues; eBay final value
fees are variable expenses.
Don't get these concepts confused. It's easy to slip and think
of your revenues as "earnings" (since you "earned" that money!), but the word
"earnings" actually refers to profits. Same with incomeincome is profit, not
revenue. If in doubt, refer to Table
A.1 for some quick guidance.
Table A.1. Basic Financial Terms
|
Proper Names for ... |
|
What You Sell |
What You Spend |
What You Get to Keep
|
|
Revenues |
Expenses |
Profits |
|
Sales |
Costs |
Earnings |
| |
|
Income |
| |
|
Bottom line |
The way it works is simple. You generate your revenues from
selling items on eBay. You subtract your expenses (cost of goods sold, daily
operating expenses), and that leaves you with your profit. (Hopefully.) Here's
what the equation looks like:
|
REVENUES EXPENSES =
PROFITS |
If you subtract expenses from revenues and get a negative
number, that means you've generated a loss; that is, you've spent more than you
earned. Not a good thing.
Let's work through a short example. Let's say that in a given
month you generate $1,000 in eBay sales. The items you sold cost you $500 to
purchase, and you spent another $300 on miscellaneous day-to-day
expensesshipping boxes, labels, Internet access, and the like. Add the $500 to
the $300 to get your total expenses, and then subtract that number ($800) from
your $1,000 of revenues. You end up with $200 left overwhich is your profit for
the month.
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