2 min read
If you want to understand how your business is doing in a financial sense, having a solid grasp of gross and net income is vital. In addition, it’s important to be cognisant of the mechanism by which you can convert gross income to net income, and vice versa. Learn more about the meaning behind these terms with our simple guide to gross vs. net income for business finances, right here.
Gross vs. net income
Knowing the differences between gross and net income can help you understand exactly how well your business is able to generate revenue. While gross income indicates your overall ability to bring in revenue, net income gives you a greater insight into your business’s expenses and how that impacts your company’s bottom line. So, what is net and gross income?
What is net and gross income?
Essentially, gross income refers to the total revenue generated from a business’s sales, whereas net income refers to the profit made by that revenue after expenses are considered. Here’s a little more insight into these two types of revenue:
Understanding gross income
Gross income – also referred to as gross profit or gross margin – refers to the total amount of income that your business has generated over a specific period (i.e. quarterly, annually, etc.), minus the cost of goods sold (COGS). All other expenses are included in the gross income figure. To calculate your business’s gross income, you can use the following formula:
It’s important, therefore, to understand exactly what expenses are included in COGS. Basically, this figure includes the combined costs associated with everything that directly contributes to producing the goods/services that are sold by your business. For example, supply costs, packaging, raw materials, and labour costs (for employees involved directly in manufacturing) will all be included in COGS.
Understanding net income
Net income, by contrast, refers to the actual profit made by the business after all additional expenses are factored in. In other words, it’s what’s left over. Because COGS is already factored into gross income, you’ll need to subtract expenses like taxes, sales expenses, payroll (for employees not directly involved in manufacturing, marketing, and business overheads. You can use this formula to calculate net income:
When it comes to gross vs. net income, it’s important to recognise that these figures are telling you different things about your business. Although gross income provides you with insight into your firm’s overall ability to generate revenue, net income gives you a much more accurate picture of your company’s profitability.
Gross and net income: business or personal?
Gross and net income doesn’t just apply to business finances, but can also be used to describe an individual’s salary. In these cases, gross income simply refers to baseline salary, whereas net income refers to take-home pay after deductions, taxes, and so on. In this article, we’re mainly focusing on gross and net income as it relates to your business’s finances.
How to convert net to gross income
Now that you know a little more about gross vs. net income, let’s consider how to convert net to gross income. Put simply, you just need to work backwards from net income. Therefore, you can start converting net income to gross income by using the following formula:
Of course, if you’d like to try converting net income to gross income as it relates to your salary, there are plenty of online gross to net income calculators that you can use.
Who is GoCardless?
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.