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:

Profit Equation

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.