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Hey, small business owners, here is a pop quiz: If your company had $50,000 in sales last month, does that mean you had $50,000 in business income? If you answered “no,” you are correct. If you answered “yes,” you are not alone. Many small business owners confuse sales revenue with gross income and net income. To determine if your small business is generating profits or losing money, you must learn how to calculate business income.
Once you understand how business income is determined, you will have a clear picture of your business’s financial situation. This will help you pinpoint the products or services driving profits or costing your business too much money to sell. In this Balboa Capital blog post, you will learn how easy it is to calculate your business’s income.
Revenue vs. income.
You need to understand the difference between revenue and income. Revenue is the total amount of money your business generates from selling products or services in a specific period. Here is an example that explains this in more detail. A food truck business that sells hamburgers, French fries, and beverages posted a top-line revenue of $34,500 last month. The $34,500 gross revenue is also referred to as gross income.
Next, there are two types of business income: gross income and net income. For example, in the scenario above, the food truck business had sales totaling $34,500 last quarter. This is the gross income, which does not consider the food truck’s expenses for this period. The $34,500 goes at the top of the food truck company’s income statement, above its monthly expenses such as food, beverages, paper products, fuel, and parking permits.
Net income is the amount of money the food truck business has after all of its expenses, taxes, and deductions have been taken out. In accounting terms, this is the cost of goods sold (COGS). Therefore, if the food truck’s gross revenue for last quarter was $34,500 and the COGS totaled $8,500, the net income for that quarter is $26,000 ($34,500 minus $8,500).
Accurate bookkeeping is vital.
Before we explain how to calculate your company’s gross income, we want to emphasize the importance of having accurate financial records. Knowing where your company stands enables you to make the best decisions regarding investing, hiring, or expanding. Precise bookkeeping can also help prevent tax mistakes that lead to costly IRS penalties or fines. To ensure that your financials are correct and well organized, you might want to seek outside help from a business accountant if you do not have one on your staff.
Crunching the numbers.
Calculating your business income is relatively simple, so long as you regularly keep your financial records. Add your total sales revenue for a particular month, quarter, or year to start. After you are finished with this step, add up the total COGS for the same given period. To calculate your business income, subtract your COGS from your total sales revenue. Here is a more detailed illustration based on the food truck scenario mentioned earlier in this blog post.
|Food truck sales for last quarter||$34,500|
|Gross food truck sales – total expenses = net business income
$34,500 – $8,500 = $26,000
|The food truck had $28,500 in business income for the quarter.|
Evaluating your results.
You can measure your business income monthly, quarterly, or annually. If the amount of sales revenue you earn surpasses the amount of business expenses incurred, that is good news. It shows that your company is performing well from a sales revenue standpoint. Solid revenues enable you to meet your financial obligations promptly without putting a dent in your bottom line.
If your results show more expenses than sales revenue, there might be a problem. Perhaps you are spending too much on expenses or not generating enough revenue to maintain a healthy bottom line. You can look at ways to cut unnecessary business expenses or find less-expensive alternatives. In addition, evaluate your pricing strategy and the sales performance of your products or services. Then, it might be time to make some much-needed changes.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.