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How to Compute Your Business Income

How to Compute Your Business Income

    Every person or organization engaging in business activities has the goal of earning income or profit. They provide products and/or services in exchange for a price that will gain them some sort of profit.

    The existence and continuity of every business relies heavily on how well a person or company sells their products and/or services — and also how good they manage and minimize business expenses. These two factors cause the business either to earn profit or incur losses.

    It’s a common mistake to think that the business is earning money if there is a sale. However, the real test of good business performance lies on business income.

    To determine if the business is profiting or losing money, you need to learn how to compute your business income.

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    Most businesses leave the job of computing their business income to their accountants. It is a practical move because accountants are technically competent to do the job. However, it is crucial that a businessperson understand the factors in computing business income so that they can better interpret and manage the financial result of the business operation. Furthermore, it can help the business determine which product or service is earning or incurring losses. As such, they can decide which product or service they should continue to sell and which to stop selling.

    In this article, I hope to share with you my knowledge in accounting to help you better manage your own business finances. You will discover tools that will help you to compute your business income and learn the factors which can help you interpret the numbers shown in an income report.

    Business Income Computation

    Generally, business income is computed as follows:

    Business Income = Revenue – Expense

    Business income is the amount of gain (in monetary value or in kind) earned from a sale of a service and/or product after deducting all incidental expenses incurred by the business.

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    Revenue is the amount of money received (or to be received) in exchange for the product and/or services provided and sold. Revenue includes gross receipts on sale of service — or gross sales on sale of product. For each sale of a product or service, the amount of revenue increases. Meanwhile, sales discounts and allowances given to buyers or customers for bulk orders or special promos decrease the amount of revenue. Sample sales of products includes the sale of grocery items, bags, shoes, clothes, software, electronic gadgets, books, etc. On the other hand, the sale of a service includes service fees earned from transportation, communication and sale of professional skills like freelance writing, virtual assisting, accounting, legal advice, doctor, etc.

    Expense is the amount of money paid (or to be paid) in exchange for product and/or service received and purchased. Sample expenses include inventory purchases, salary and wages, transportation, advertising, electric and water bills, communication, professional fees, etc.

    3 Easy Steps in Computing Business Income

    1. Identify all the products and/or services sold in a given period and then total the amount. The total represents your revenue.
    2. Identify all the costs you pay in order to operate your business in the same given period. The total represents your total expenses.
    3. To compute your business income, subtract your total expenses against your total revenue.

    Sample Illustration and Computation

    John Doe is a software developer who owns a Software Company which focuses on developing and selling online software. Additionally, he has a number of blogs that promotes other people’s products and in return, he earns commission income. (Note that the period we want to compute is for the whole year of 2011.)

    Step 1 – During 2011, Joe’s revenue was as follows:

    Sale of Software                                                                            $200,000
    Commission on sales of other people’s product                         40,000
    Total Revenue                                                                               $240,000

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    Step 2 – The cost in operating Joe’s Software Company during 2011 includes the following:

    Web Hosting Expenses                                                                       $2,400
    Domain Fees                                                                                                 10
    Salaries Paid                                                                                         60,000
    Rental and Utilities Expenses                                                           10,000
    Total Expenses                                                                                   $72,410

    Step 3 – Joe’s business income in 2011 is $167590, computed as follows:

    Business Income = Total Revenue – Total Expenses
    = $240,000 – $72,410
    = $167,590

    Based on computed business income for 2011, Joe’s Software Company is showing a good performance since the total revenue is greater than the total expenses.

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    Conclusion – Interpreting Business Income

    1. If Revenue > Expense = Income/Profit.

    When the amount of revenue earned is greater than the expenses incurred, it can mean the business operation is doing well because there is enough amount of money to pay all the business expenses. Also, it is an indicator of good business management.

    2. If Revenue < Expense = Loss.

    When the amount of expenses spent is greater than the revenue earned, it signals poor business performance since the amount received in selling products and/or services is not enough to pay all the expenses necessary to operate the business. Furthermore, this may indicate poor business management.

    3. If Revenue = Expense, we call it “Break-Even Point”.

    When the business revenue is equal to the expense, we call it break-even point. This indicates that the business is neither earning nor incurring loses. The earning is just exactly enough to pay the business operating expenses. It can still show poor business performance and management since the objective of a business is to earn profit.

    (Photo credit: Accounting via Shutterstock)

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    Lou Macabasco

    Lou Macabasco aspires to spread positive motivation.

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    Last Updated on March 29, 2021

    Life Insurance: A Secure Way To Protect Your Future.

    Life Insurance: A Secure Way To Protect Your Future.

    Life is a journey full of ups and downs. No one can actually predict what might happen the next moment; there are times where the happiest moments do not even take a second to turn into the gravest. Planning for your future can help you face such unwelcomed but irrepressible situations with much ease. We all want to make every memorable event of our life more special and to cherish all those moments happily and worry less, you must financially plan your future. But no one has control over life and death. Who would wish to see his family suffer in his absence? Insurance hands over the financial jeopardy of life’s happenings to an insurance company.

    Importance of getting a life insurance

    No one has control over life and death. Nobody would like to see their family suffering in an absence, and that’s why many people recommend life insurance. A life insurance plan is one of the best ways to secure the future of your family, even against those financial troubles after an untimely demise. These plans are safe and credible, and you could trust them for your family’s better future.

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    On the other hand, a life insurance policy is a contract between a company (insurance provider) and policyholder in which the insurance provider ensures to pay a certain amount of money to the nominated beneficiary in case of the policyholder’s death during the term of the agreement. There are different types of insurance plans, and it is important for you to know the benefits of those plans such as a funeral, medical or some life expenses provided they are mentioned in the agreement.

    Choosing the right insurance plan

    If you’re about to select an insurance plan, you should consider some important factors:

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    • The time at which you start investing in a program and the number of family members you want to get insured. Obviously, a married man with two children has different needs compared to a single one. The number of persons who are dependent on an individual also varies from person to person.
    • The next thing you need to consider is you and your family needs. What are your child’s dream, your retirement plans, for how long would your dependents need financial support, any personal injury, etc. And do not forget those events or situations that will surely demand a huge sum of money.
    • The next thing one must consider is your current income. You should preferably choose a plan which you can afford.

    Now you must be having a pretty clear idea of how to choose the best plan for you. Further, you should also compare various plans offered by different companies and numerous sites available online that help will you to compare them.

    Differences between life insurance plans

    Here’s a short brief of some plan categories you can choose according to your needs:

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    • Term Insurance Plan – You have to pay once, and your nominee gets the paid money under your misfortune demise. It ensures a person for a fixed time. If you survive the policy period, you do not get your premiums back.
    • Whole Life Policy – This plan continues for your lifetime. Under this, the policyholder has to pay regular premiums, until their death.
    • Endowment Policy –  In case the individual dies during the tenure, the beneficiary gets the amount assured. If the person survives the policy tenure, they gets back the premiums paid with other investment returns along with several other benefits.
    • Money Back Policy – In this a portion of the money invested is returned to the investor at regular intervals. If you survive the insurance term you get the entire amount back; else the beneficiary receives the entire sum assured.
    • ULIPs – These are the life insurance plans that offer you future security plus wealth creation options.

    Many people do not opt for whole life policy and endowment policy because of the high amount of money you need to pay, while others may prefer to opt for these if they have a high life expectancy. Surely you will find the best one for you.

    So what are you waiting for? Plan for your future and live a happier and carefree life today.

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    Featured photo credit: aryehsampson.com via aryehsampson.com

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