Small business owners must pay close attention to their financial transactions, including both expenses and income. While income may come from a variety of different sources, there are generally two different forms of income: net and gross. Some accounting software and systems automatically decipher this information, whereas others require the business owner to manually update his or her net and gross income.
So, what’s the difference between gross and net income? Gross income refers to the total amount of income before deductions are made, whereas net income refers to the total amount of income after deductions are made.
Regardless of niche/industry, all small businesses will have some form of operating expenses. This may include employee payroll, utilities, building rental, marketing and advertising, customer acquisition, accounting, etc. Even if the business earns $300,000 in annual revenue, it may only “profit” $150,000 after deducting all of its related operating expenses. In other words, its gross revenue would be $300,000, while its net income would be $150,000. It’s a rather simple formula that should become second nature to business owners and entrepreneurs.
Both gross revenue and net income are equally important when tracking your financial transactions, although net revenue is indicative of your business’s profits.
In addition to gross revenue and net income, there’s also gross margin, which is the percentage of profit earned after adjusting the gross income. Using the same example cited above, a business with a gross income of $300,000 and a net profit of $150,000 would have a gross margin of 50%. $150,000 is 50% (half) of $300,000; therefore, the gross margin is 50%. If a business notices a decline in its gross margin, it may want to reevaluate its operations to try and turn this number back in a positive direction.
Hopefully, this will give you a better understanding of gross revenue, net income and gross margins. Generally speaking, gross income is the total amount of income that a business (or individual) has earned before taking into account deductions. Net income is the total amount of income after deductions have been made. And gross margin is the percentage of profits that a business has earned, calculated by diving gross margins and net profits, expressed as a percentage.