Revenue, Cost & Profit
Revenue is not profit. Walk one month of a coffee shop from money-in to the bottom line, defining every word — COGS, gross margin, opex, operating profit — as it appears.
What you'll learn
- Revenue, COGS, and gross profit — and why gross margin is a percentage
- Fixed operating expenses (opex) vs the cost of each sale
- Operating profit and net profit — the real bottom line
- Why a business can have big revenue and still lose money
Before you start
Every analyst, founder, and investor reads from the same map when they look at a business: money flows in at the top, costs get subtracted one layer at a time, and whatever survives is profit. That map has names — revenue, COGS, gross profit, opex, operating profit, net profit — and once you have the vocabulary you can read any business in minutes.
Let’s walk one month of a single coffee shop and define every term the moment it shows up.
Revenue — the top line
Revenue (also called sales or top line — because it sits at the very top of every financial report) is the total money a business receives from selling its product or service before any costs are taken out.
For our coffee shop:
- Price per coffee: $4.00
- Coffees sold in the month: 5,000
- Revenue = $4.00 x 5,000 = $20,000
That’s it. No costs subtracted yet. Revenue is purely money in from customers.
COGS — the cost of each sale
COGS stands for cost of goods sold: the direct cost to produce each unit that was sold. For a coffee shop those are the ingredients that go into every cup.
- Beans + milk + cup per coffee: $1.20
- 5,000 coffees sold
- COGS = $1.20 x 5,000 = $6,000
COGS scales with volume. Sell twice as many coffees and COGS roughly doubles. That’s what makes it a “variable” cost — it moves with output, unlike a fixed cost such as rent, which stays the same no matter how much you sell.
Gross profit and gross margin
Subtract COGS from revenue and you get gross profit: what’s left after paying for the things you actually sold.
Gross profit = Revenue − COGS = $20,000 − $6,000 = $14,000
Analysts usually express this as a percentage called gross margin — where margin means a profit figure expressed as a fraction of revenue, so you can compare businesses of different sizes.
Gross margin = Gross profit ÷ Revenue = $14,000 ÷ $20,000 = 70%
A 70% gross margin means every dollar of revenue leaves 70 cents to cover everything else (rent, staff, taxes) and still turn a profit. High gross margins give a business room to breathe; thin ones leave almost nothing for the layers below.
Operating expenses (opex) — the fixed running costs
So far we’ve only subtracted the cost of making the coffee. But the shop has other bills that come in every month regardless of how many cups are sold.
Operating expenses (opex) are the recurring costs of running the business that do not scale directly with each unit sold.
| Expense | Monthly cost |
|---|---|
| Rent | $4,000 |
| Staff wages | $7,000 |
| Utilities | $1,000 |
| Total opex | $12,000 |
Whether the shop sells 5,000 coffees or 4,000, rent is still $4,000. That fixed nature is the defining feature of opex.
Operating profit — what the business actually earns from operations
Operating profit (also called EBIT — earnings before interest and taxes — in formal accounting) is gross profit minus opex. It answers: after paying to make the product AND to run the business, how much is left?
Operating profit = Gross profit − Opex = $14,000 − $12,000 = $2,000
Out of $20,000 in sales, only $2,000 survives after production costs and running costs. That is a thin margin — and it explains exactly why the owner said “we barely made money.”
Net profit — the bottom line
Net profit (the bottom line — because it sits at the very bottom of the report) is what remains after every single cost, including interest on loans and income taxes.
For this simplified example, we will skip interest and taxes to keep the numbers clean. In that case:
Net profit ≈ $2,000
Net margin = Net profit ÷ Revenue = $2,000 ÷ $20,000 = 10%
A 10% net margin means the shop keeps 10 cents of every dollar it brings in. In the real world, tax and debt service would push this lower.
The full picture — one bar, three layers
The diagram below shows where the $20,000 goes. Every dollar of revenue is split across three destinations: COGS, opex, and profit. The revenue bar on the left splits into those three pieces on the right.
$20,000 revenue splits into three layers. Gross profit ($14,000) is revenue minus COGS. Operating profit ($2,000) is gross profit minus opex.
Key intuitions to lock in
- Revenue is the top line — money in, before any deductions.
- COGS scales with every sale; opex is mostly fixed.
- Gross margin (here 70%) is the breathing room above operating costs.
- Operating profit is the number that shows whether the core business is viable.
- Net profit (the bottom line) is what remains after everything — taxes, interest, all of it.
- The gap between top line and bottom line is filled entirely by costs. Understand the costs and you understand the business.
Vocabulary recap
| Term | One-line definition |
|---|---|
| Revenue | Total money received from sales |
| COGS | Direct cost to produce each unit sold |
| Gross profit | Revenue − COGS |
| Margin | A profit expressed as % of revenue |
| Gross margin | Gross profit ÷ Revenue |
| Opex | Fixed running costs (rent, staff, etc.) |
| Operating profit | Gross profit − Opex |
| Net profit | Final profit after all costs including tax |
| Top line | Revenue |
| Bottom line | Net profit |
Quick check
Next
Reading a full P&L (income statement) — the one-page document that shows every layer from revenue to net profit for a real company.