Advertising
Advertising

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.

    Advertising

    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.

    Advertising

    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

    Advertising


    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.

    Advertising

    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)

    More by this author

    Lou Macabasco

    Lou Macabasco aspires to spread positive motivation.

    6 Effective Ways to Become Persistent The Benefits of Simple Productivity 8 Ways to Stop Working Long Hours 7 Simple Steps to Resolve Any Problem How to Compute Your Business Income

    Trending in Money

    1 9 Millionaire Success Habits That Will Inspire Your Life 2 How to Set Financial Goals and Actually Meet Them 3 How to Develop a Millionaire Mindset in 6 Simple Steps 4 How to Eat Healthy on a Budget (The Definitive Guide) 5 Top 5 Spending Tracker Apps to Manage Your Budget Smart in 2020

    Read Next

    Advertising
    Advertising
    Advertising

    Last Updated on April 28, 2020

    9 Millionaire Success Habits That Will Inspire Your Life

    9 Millionaire Success Habits That Will Inspire Your Life

    As technology evolves and information becomes more accessible, it has also become more challenging to define success. A lot of people are trapped in the rat race while trying to discover the actual formula for success.

    You could become overwhelmed with what tools, techniques or philosophies to imbibe while trying to get tips over the internet. At every click and turn, there are ‘how-tos and quick-fix’ on how to become successful overnight. You will find several courses, articles, videos and books on how to achieve financial success.

    But what if I tell you it doesn’t have to be complicated as people made it out to be? What if you could achieve success by merely following these 9 millionaire success habits?

    1. Read for Personal Development

    A daily habit I have discovered millionaires share in common is reading. For instance, if you are an entrepreneur, you need to read to become an efficient leader and a productive business owner. Reading helps you to grow and learn without going to a business school.

    A research conducted by Thomas Crowley indicates about 85% of self-made millionaires read at least two or more books each month. [1] Warren Buffett is one of these examples. He spends 80% of his day reading. In the early days of his investment career, he would read 600 to 1000 pages in a single day.

    While millionaires sometimes read for pleasure, they also learn to improve themselves. They read topics on leadership, how-tos, self-help, biographies, lifehacks and also follow current events.

    Here’re some recommendations for you: 25 Best Self Improvement Books to Read No Matter How Old You Are

    2. Establish Multiple Sources of Income

    Another success habit I noticed about successful people is that they don’t depend on a single income source. Every millionaire possesses multiple sources of income. This helps them to manage economic challenges and also make more money.

    They are passive income addicts. They earn interests from loans, rental income from real estate, royalties from intellectual properties, dividends from investments. They also launch a side business or run a website or sell information products.

    How income is made either passively or actively is what separates the successful from the wannabes. They are always learning ways to build multiple streams of income.

    Advertising

    3. Live on a Stipulated Monthly Budget

    An average millionaire does not believe in luck and jackpot. They take the time to understand cash flow-income and expenses. Based on this, they establish a monthly budget and religiously stick to it.

    The essence of the budget is to minimize unnecessary expenses. This will help you gain complete control of your financial life. Budgeting helps you to avoid overspending to achieve your financial goals. Here’re some tips to help you stuck to your budget: 32 Hacks for Sticking to Your Budget

    4. Manage and Maximize Money

    The most significant education for a millionaire is financial intelligence. Nobody attains financial freedom without gaining financial intelligence. This is the more reason millionaire, regardless of their income, keep their knowledge about tax strategies updated.

    They always seek to reduce their tax bills. One approach they employ is by living or incorporating their business in states with no income tax.

    Do you know that about 60 companies paid $0 legally in the 2018 tax year? Some of these companies that ‘avoided'(note: not evaded) federal income tax include Chevron, Amazon, Halliburton, General Motors, Delta. Their US income was totaled at $79 billion with an effective tax rate of -5%.

    What’s the deal? They got a tax refund.

    How do they accomplish these?

    An ITEP report indicated that they have the culture of throwing huge sums at tax experts who assist them in discovering creative, as well as convoluted means of paying little tax as much as possible.[2]

    5. Avoid Debt

    Another habit that separates the millionaires from the rest of the world is how they manage debt.

    They don’t live an extravagant lifestyle; instead, they only buy what they need and can pay for. They do not book hotels and flights by using their credit cards to pay for them.

    Advertising

    They are conscious of the interest rates even when they use credits cards or take loans. If possible, they try to pay with cash because of its zero percent interest rate.

    6. Set Daily Goals

    It does not matter if they are setting up a business, a career, or financial projections; they have the success habit of setting short term goals. They plan daily and weekly goals to generate momentum in achieving their long-term goals.

    Ensure you prioritize when setting daily goals. This will help you to achieve the most important to-dos on your list.

    Setting priorities will help you to focus on highly rewarding activities. If you desire financial freedom, it is wise to pursue activities that earn you thousands of dollars rather than hundreds of dollars.

    7. Don’t Act Rich

    The goal is not to act rich but to be productive. Interestingly, Thomas Stanley buttressed in his book that for the most prestige brands of cars, about 86% percent are toys of the non-millionaires. While most believe that people with huge fortunes tend to drive exotic cars, in reality the largest consumers of pricey cars are aspiring millionaires.[3]

    According to findings by Experian Automotive Researchers, 61% of individuals who earn $250,000 or more rarely buy luxury brands. Instead, they buy Hondas, Toyotas, and Fords like the rest of the world. The reason is they are not ready to spend money on premium cars that tend to drop in value in a couple of years as it would cost money. Millionaires invest in assets that appreciate.[4]

    8. Own or Buy Businesses

    In Robert Kiyosaki’s cashflow quadrant, he divided how you earn income into four quadrants. The E and the S quadrants take the left position while the B and the I are on the right side. According to Robert, it is possible to be on all quadrants, but the millionaires are not.[5]

    • E stands for employee – they work for others
    • S stands for self-employed – they work for themselves
    • B stands for a Business owner- employees work for them (500 or more employees)
    • I stand for Investors – Money work for them like Warren Buffet.

    Your goal is to move from the left quadrant to the right quadrants where you own big businesses or make money work for you.

    It is possible to become financially successful by pursuing what you love. For instance, if you love writing, aspire to be the best seller. Wealth and passion work together.

    Check out How to Start a Small Business with Little to No Money for tips.

    Advertising

    9. Avoid Get-Rich-Quick Scheme

    A millionaire holds patience as an essential virtue. It takes patience to become successful, not only in finance but in every aspect of life. While it is possible to become financially successful at an early age, most millionaires hit it at age 50. They live a moderate life, invest in their future and retire rich.

    Bonus: How to Develop the Millionaire Success Habits?

    Having learned these habits, the next question is,

    How can I develop the Millionaire Success habits?

    Here are six values you will need to develop:

    Establish Your Life Vision

    You need to be clear about what you want in life to set yourself for a life of success. Your vision has to go beyond becoming a millionaire to understanding why you want to become one. Any great entrepreneur you will ever find has a clear vision and an established mission.

    Understanding why you are doing what you do will drive you to become the kind of successful person you want to be.

    Make Your Passion a Profession

    When your passion becomes your profession, work becomes pleasurable. Loving what you do enables money to flow to you and through you.

    So what’s going to be? Wake up every morning by speaking positive words into your work, love what you do, and focus on the work that brings you joy.

    Take a look at this article and learn how to make it happen: 5 Steps To Turn Your Passion Into A Career

    Focus on Solution

    Focusing on the solution means establishing the problem that you or your business address. This will help you focus on the solutions when others are faced with challenges.

    Advertising

    A millionaire has a mindset that is fixed on the solution. He or she knows there’s a way out, and that every problem is an opportunity in disguise.

    Improve your problem solving skills with these tips: 6 Effective Ways to Enhance Your Problem Solving Skills

    Develop Your Leadership Skills

    Leadership skills are an asset that is indispensable if you want to develop a millionaire success habit. The more you hone your leadership skills, the more you will attract leaders who share your values.

    Be Growth-Focused

    Millionaire entrepreneurs prioritize self-improvement. Here’s how to achieve it:

    • Get a coach. Coaching will impact your life, and you will achieve peak performance in life and business when you have a life coach.
    • Be coachable. It is not enough to have a coach; you must be coachable. Sometimes, you need feedback and counsel to reposition your life and business. A coach has the wisdom and experience to counsel you from a higher perspective. The more you receive feedback and work on yourself, the more you become better at what you do and who you are.

    Flip Your Thought Pattern From Acting To Being

    It is not enough to have a millionaire success habit, you must also become a person of positive influence. This is how you can become significant. Bill Gates is not only rich; he is changing lives in Africa and different parts of the world.

    If you want to become successful, you must first be and think like a successful person. This is how resources you need can flow into your life.

    Here’s a final thought from me:

    It is not enough to do something to have something; success is about being someone who possesses what is needed to take positive and inspired actions.

    More Success Habits

    Featured photo credit: Austin Distel via unsplash.com

    Reference

    Read Next