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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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    Last Updated on January 2, 2019

    How Personal Finance Software Helps You Get More Out of Your Money

    How Personal Finance Software Helps You Get More Out of Your Money

    Do you know what mental health experts point to as the biggest cause of stress in the United States today? If you said “money,” then ding, ding, we have a winner!

    Three out of four adults today report feeling stressed out about money at least part of the time. People are either worried about not having enough money or whether they’re putting the money they do have to use in the best possible way.

    Your money is either in charge of you or you’re in charge of it, there’s no middle ground. Using some type of personal finance software can help alleviate some of that money stress and better allow you to manage your money effectively. Without it, you may just be setting yourself up for constant financial worry. Life is already tough enough and there’s no need to make it more difficult by simply hoping your money issues will all work out in your favor. Hint: they won’t.

    This guide will help you to understand how personal finance software can better assist with both accomplishing long term financial goals and managing day-to-day aspects of life.

    Whether it’s tracking the savings plan for your child’s college fund or making sure you won’t be in the red with the month’s grocery budget, personal finance software keeps all this information in one convenient place.

    What Exactly is Personal Finance Software?

    Think of it like the dashboard in your car. You have a speedometer to tell you how fast you’re going, an odometer to tell you how far you’ve traveled, and then other gauges to tell you things like how much gas is in the tank and your engine temperature. Personal finance software is essentially the same thing for your money.

    When you install this software on your computer, tablet, or smartphone, it helps to track your money — how much is going in, how much is going out, and its growth. Most personal finance software programs will display your budget, spending, investments, bills, savings accounts, and even retirement plans, levels of debt, and credit score.

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    How It Leads to Financial Improvement

    It shouldn’t come as a surprise, but people who regularly monitor their finances end up wealthier than those who don’t. When you were a kid, keeping track of all of your money in a porcelain piggy bank was pretty easy. As we get older, though, our money becomes spread out across things like car payments, mortgages, retirement funds, taxes, and other investments and debts. All of these things make keeping track of our money a lot more complicated.

    Some types of personal finance software can help make things a little less complicated, setting you up to meet financial goals and taking away some of the stress associated with money.

    Even if you already have a Certified Financial Planner (CFP) some type of personal finance software can be of great benefit. Whereas CFPs focus on the big picture of your money, they don’t handle the day-to-day aspects that determine your overall financial health.

    It’s also not nearly as complicated as you might think and can take out a lot of the tedium that comes with doing everything on an Excel spreadsheet or with a pad and pencil.

    Types of Personal Finance Software

    When it comes to personal finance software, it generally fits into two categories: tax preparation and money management.

    Tax preparation software such as Turbo Tax and H&R Block’s software can help with everything from filing income taxes to IRS rules and regulations and even estate plans. Plus, there’s the benefit of filing online and getting your refund check a lot faster than if you were to mail off your forms after waiting in line at the post office.

    For the purpose of this article, however, will be focusing more on the personal finance software that aids with money management.

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    Money management personal finance software will help you to see the health of your cash flow, pay down debt, forecast for expenses and savings, track investments, pay bills, and do a host of other things that 30 years ago would have practically required a team of accountants.

    When to Use Personal Finance Software

    So far we’ve gone over what exactly personal finance software is and how it can be a benefit to your money. The next logical step in this whole equation is determining when it should be used and how is the best way to go about getting started using it.

    Below are four of the most common and practical ways to use personal finance software. If all or any of these apply to you and your money, then downloading some type of personal finance software is going to be a smart move.

    1. You Have Multiple Accounts

    There’s a good chance that when it comes to your money, it’s in more than one place. Sure, you probably have a checking account, but you may also have a savings account, money market account, and retirement accounts such as an IRA or 401k.

    If you’re like the average American, you probably have two to three credit cards as well. Fifty percent of Americans also don’t have loyalty to just one bank and spread their money across multiple banks.

    Rather than spending hours typing in every detail of every account you have into a spreadsheet, many programs allow you to easily import your account information. This will help to eliminate any mistakes and give you a bird’s eye view of everything at once.

    2. You Want to Automate Some or All of Your Payments

    Please don’t say that you’re still writing out paper checks and dropping each bill in the mailbox. While it’s noble that you’re doing your part to keep postal workers employed, we’re 18 years into the 21st century and you can literally pay every bill online now.

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    There’s no need to log into every account you have and type in your routing number either.

    With personal finance software you can schedule automatic payments and transfers between all of your imported accounts. Automatic transfers will help to make sure you have the necessary funds in the right account to ensure all bills are paid on the appropriate date. Late fees are annoying and do nothing but cost you money. It’s time that you said goodbye to them once and for all.

    3. You Need to Streamline Your Budget

    Perhaps the best feature of personal finance software is that it allows you track everything going in and out of your virtual wallet.

    Nearly every brand of personal finance software out there has easy-to-read graphs and charts that allow you track every cent you spend or earn, should you choose. You might be pretty amazed when you see just how much you spent on eating out last month or if you splurged a little more than you should have on Christmas gifts last year.

    Every successful business on the planet has a budget and using personal finance software can help you trim the fat on your spending in ways that affect your everyday life.

    4. You Have Specific Goals to Meet

    Maybe it’s paying off debt or saving for up something like a European vacation. Whatever your financial goal is, whether it’s long-term or short-term, personal finance software programs are one of the savviest ways to go about reaching those goals.

    You can do everything from set spending alerts to notify you when you’re over budget to automating what percentage of your paycheck goes to things like retirement investments. The personal finance software that you choose should show you exactly how close you are to hitting those goals at any given time.

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    How to Get Started

    From AceMoney to Mint and Quicken, there ’s no shortage of personal finance software apps out there. Many of these programs are free to download and will allow you to pay bills, invest, monitor your net worth and credit profile, and even get a loan with the swipe of a finger.

    Other programs may only offer you limited services and will require a one-time fee or subscription to unlock all that they offer. These fees can often vary from as little as two dollars to 50 bucks a month.

    It’s best to start off with the free version and then gauge whether you’re able to accomplish everything you’d like or if it’s worth exploring one of the paid options. Often times the subscription programs come with assistance from financial planning and investment experts — so that can be a real benefit.

    When deciding which personal finance software program to use, it’s also important to look at how many accounts you wish to monitor. Certain programs limit the number of accounts you can add. Be sure that if you have checking, credit card, and investment accounts to monitor, that you choose a service that can monitor them all.

    Finally, when looking around for the right personal finance software that meets your needs, make sure that you’re comfortable with the program’s interface. It shouldn’t be expected that you recognize every single feature instantly, but if the features don’t seem readable and manageable to you, then you’re not as likely to use it and get the full benefits.

    Final Thoughts

    Personal finance software can go a long way in helping you to take control of your money and meeting your financial goals. It’s important to note, however, that some focus more on budgeting and expense tracking while others prioritize investing portfolios and income taxes. Explore several different programs and read reviews to find the one that’s right for you.

    In this day and age, managing one’s personal finances in a secure manner that allows the user to have a real-time visual representation of their money is easier than ever before. With the numerous applications that are out there — both free and subscription-based — there’s no reason that every person can’t take control of their money and ensure they’re making smart money moves.

    Featured photo credit: rawpixel via unsplash.com

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