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. In order for you to find out if your company is generating profits or losing money, you need to learn how to calculate business income.
Once you gain a better understanding of how business income is determined, you will have a clear picture of your company’s financial situation. This will help you pinpoint the products or services that are driving profits or costing your company too much money to sell. In this Balboa Capital blog post, you will learn how easy it is to compute your company’s income.
Revenue vs. income.
It is important for you to understand the difference between revenue and income. Revenue is the total amount of money that your business generated 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 number of $34,500 last month. The $34,500 is the gross revenue, which is also referred to as gross income.
Next, there are two types of business income: gross income and net income. In the scenario above, the food truck business had sales totaling $34,500 last quarter. This is the gross income, which does not take into account 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 referred to as 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 key.
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 at all times enables you to make the best decisions when it comes to investing, hiring, or expanding. Accurate bookkeeping can also help prevent tax mistakes that can lead to costly IRS penalties and/or fines. To make sure 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 keep your financial records up-to-date on a regular basis. To get started, add up your total sales revenue for a particular month, quarter, or year. After you are finished with this step, add up the total COGS for the same given period. To compute your business income, subtract your COGS from your total sales revenue. Here is a more detailed illustration based on the food truck scenario that is 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 on a monthly, quarterly or annual basis. 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 in a timely manner, and without putting a dent in your bottom line.
If your results show more expenses than sales revenue, there might be a problem somewhere. 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. It might be time to make some much-needed changes.