The term "income" has a double meaning. On the one hand, it refers to the gross receipts or total earnings from sales of products or services. On the other hand, it refers to the net, or whatever is left over after subtracting the funds needed to pay your expenses. For a business, the subtracted portion is the amount you spend on operating expenses such as rent, material and labor, or the specific costs of running your company.
Gross Receipts, Gross Profit and Net Profit
- The term "gross receipts" refers to the sum of the amounts that your company has billed its customers for the products and services it has provided.
- The term "gross profit" refers to the amount left over after subtracting the cost of goods sold (COGS), or labor and materials dedicated specifically to producing your products and services, from your gross receipts.
- The term "net profit" refers to the amount left over after subtracting all of your other operating expenses from your gross profit.
Calculating Net Monthly Income
- Tally your gross receipts, or total income for the month. This is the amount that your company has billed its customers for the products and services it has provided.
- Calculate your COGS, or cost of labor and materials that directly went into the final product that you provided to your customers. Subtract monthly COGS from monthly gross receipts to calculate monthly gross profit.
- Add all of the other costs that the IRS recognizes as deductible business expenses. If you're not sure which business expenses are deductible, start with the "expenses" section on a tax form such as Form 1040, Schedule C. This tax form is a tool for calculating annual rather than monthly income, but it'll provide you with a starting point or template that you can apply to the month rather than the year.
- Subtract all of these monthly expenses from your gross monthly income to arrive at your company's net monthly income.
Why Calculate Net Monthly Income?
Calculating net monthly income helps you to plan. If you just work with your gross monthly figure, you won't know how much money you actually have at the end of the day because you won't be accounting for the expenses. Net monthly income figures are also often required on the forms you complete when you apply for financing. This information helps the lending institution get a sense of whether your business will be able to pay back the sums you want to borrow.