What is Gross Income for Businesses?

cloud accounting
- ADVERTISEMENT -

Have you ever felt a slight disconnect between how much money you think that your business generates verus how much money actually lends to your account? We are pretty sure you did! And the reason for that is because most SMEs are well aware of their net income, but rarely pay close attention to their gross income figures. So let’s fix that, shall we?

What is Gross Income For a Business?

Gross income, also going by the name of gross margin and gross profit, stands for all the revenue you generate across all sources minus the cost of goods sold (for product companies) and cost of services delivered (for service-oriented businesses).

So if, for example, you are running a freelance photography side hustle, your gross income will constitute the grand sum of all the invoices you banked during one month/year.

In essence, “gross” stands for total aka every penny you’ve generated. Net income, in turn, represents the dollar amount your business retains after all the expenses, deductions and other withholdings.

OK, What is Adjusted Gross Income Then?

Adjusted gross income (AGI) is the figure you’ve probably seen on the tax Form 1040. AGI is a benchmark number the US Internal Revenue Service uses to calculate your tax rate, payment sums and eligible benefits.

If you want to calculate your company’s adjusted gross annual income, you need to:

  • Add up all the money you’ve earned during that calendar year
  • Subtract all the relevant deductions that can be applied to your gross income

You can find these sitting atop of the aforementioned Schedule 1 Form 1040.

Above the line deductions are your legal way to reduce your tax bill since they minimize your total gross income. In fact, as a small business owner you are at an advantage here as you can deduct most of the expenses related to your business if you are registered as a sole proprietorship.

Previously, we published a big list of tax deductions for SMEs. So be sure to check it too!

Why Do I Need to Know My Gross Business Income

There’s plenty of various formulas to know just how profitable your business is. Gross income calculation is one of them. What’s more, it’s also an essential number to know if you’d like to dig deeper into your financial matters and calculate either of the following:

See? Gross income is quite a handy number. Now, let’s do some quick maths.

How to Calculate Gross Income for a Business

If you have your accounting done for you or use some app for that, you’ve probably seen the gross income figure already on your profit and loss statement. Also, you’ll get that figure calculated for you by the IRS when you file your annual return.

But if you want to run a quick calculation for yourself before the tax season or say for a monthly period, here’s your business gross income formula for that:

Gross Income = (Gross Revenue – COGS (or Cost of Revenue)) + Other Income

That’s a short version since you also need to figure out your gross revenue and COGS. So let’s do just that with some examples along the way.

Sample Gross Income Calculation for a Small Business

Let’s say you are running a small events agency and mainly organize weddings and other events for the folks at your community.

To estimate your business gross income you’ll first need to calculate your total revenue for the period. That’s a simple one:

Revenue = Number of Customers x Average Price of Services/Products.

Let’s say that you served 15 customers with an average bill of $2,500. Your revenue will be $37,500.

You are also allowed to deduct returns and allowances (such as discounts). Let’s say, you’ve discounted $1,500 across all customers.

So now we have the first figure for your business: gross revenue equal to $36,000 ($37,500 – $1,500).

Next, let’s calculate your cost of goods sold (COGS). As a service business, you actually don’t have COGS. Instead, you have cost of revenue or cost of services – the direct costs associated with delivering a product.

For example, your agency hired several subcontractors that helped with planning last year. Their salaries were $10,000 total.

Lastly, you also made some side-profits during that time: recovered a bad debt — a vendor returned you a $5,000 loan + 2% on top. This qualifies as your Other Income, along with relevant tax credits and refunds.

Now, let’s make the final calculation:

(36,000—10,000) +5,100 = 31,100 (gross income)

To Conclude

Gross profit is a handy number to know as it gives you a better projection into your operations and potential earnings during the estimated time period. The calculation itself is pretty straightforward if your business is running on the cash method and you rely on constructive receipt when making calculations. This formula won’t work for companies who prefer accrual accounting, mind that!

Photo by Burst

No Comments

Post a Comment