vgajic / Getty Images If you run a business, it’s vital to know how to calculate and use gross income. Learn more about how it works and the benefits.
What Is Business Gross Income?
Gross business income is the total income a business receives before any taxes, expenses, adjustments, exemptions, or deductions are taken out. It is calculated on a business tax return as the total business sales less cost of goods sold (COGS) and appears on the income (profit and loss) statement as a starting figure. From there, it is reduced by returns, allowances, and other deductions to get net income or net earnings.
How to Calculate Business Gross Income
To calculate your business gross income, begin by adding up the total sales before anything is subtracted. Next, add up the total COGS, which is the amount that was required to produce or buy the products sold. For example, if you sell cars, you would add up the cost of the engine, tires, and any other parts purchased to make the car. Subtracting the COGS from revenue will give you the business gross income. For instance, if your business sold $1 million in products and the cost to produce those products was $600,000, your gross income would be $400,000.
How Business Gross Income Works
One of the more important reasons to know your business’s gross income is its use for tax purposes. Each company must report their gross income on their business tax return, and this number is used to determine how much taxes are owed. Outside of that, it’s significant because it’s the basis for many other business financials that determine your business’s profitability and viability. By knowing the gross income, you can calculate the gross profit margin, which is the percentage of revenue remaining after subtracting COGS. For example, if sales are $1 million and gross income is $400,000, the gross profit margin would be 40%. Knowing this percentage gives you an idea of how much your COGS is taking away from your sales.
Difference Between Gross and Net Income
A company’s gross income focuses on all revenue before any expenses, while the net income considers all of the following:
Payroll costsTaxesUtilitiesDeductionsBusiness operation costs
In accounting and financial terms, you always go from gross to net when performing any calculations. Gross numbers are figures that have not had any amount deducted from them, and they are always the starting point. Net income will always be lower than the gross income. A company’s net income is referred to as its top line because it’s the top line on its income statement. Once operating expenses, taxes, and other deductions are taken into account, you arrive at the net income, or bottom line. The bottom line shows a company’s profits for that statement period.
Limitations of Business Gross Income
One major drawback of business gross income is it doesn’t account for business and operational expenses. It’s hard to get an accurate picture of a company’s financial health by solely looking at the gross income; you need to know their other expenses. A business may have a gross income of $1 million, but that doesn’t mean as much if they have $800,000 in expenses and a $100,000 tax bill. Gross income is a great starting point, but its best used as a means to an end. It doesn’t tell the full story.
