Gross income is an important financial figure you can use to calculate other figures and determine how your business is doing. Learn about gross income, how to calculate it, and how to use it.
What is gross income?
Gross business income is the amount your business earns from selling goods or services before you subtract taxes and other expenses. Your business’s gross income is your revenue minus your cost of goods sold (COGS).
You can find your gross income on your business’s income statement. If there isn’t a specific line on income statement indicating your gross income, you can use the information on the income statement to calculate it.
How to use gross income
Gross income is the starting point for calculating other important business numbers, including taxes.
You will use small business gross income on your business tax return. You will report this amount and use it to calculate taxes.
You can use your gross income to determine how much your COGS is taking from your total sales. If your gross income continually stagnates or shrinks, take a look at your gross revenue and COGS. If the gross revenue is greatly decreasing or the COGS is greatly increasing, you may have a problem.
You can also use your gross income to determine your business’s debt-to-income ratio. This ratio can help you consider how much debt your business can support. Divide the debt amount by your gross income to calculate the debt-to-income ratio.
How to calculate gross income
The gross income formula is:
Gross Income = Gross Revenue – COGS
Gross revenue is your business’s total sales before anything is subtracted.
Cost of goods sold is the overhead required to produce or buy the goods you sell. Let’s say you build tables. You must buy wood, glue, screws, and other products and tools to make the tables. The total cost of all the supplies needed to build the tables is the COGS.
Gross business income example
Let’s say your business makes $250,000 in total sales during the first quarter. The cost to produce the goods you sold was $100,000. To find your gross income, subtract the COGS from the total sales.
$250,000 – $100,000 = $150,000
Your business’s gross income for the first quarter was $150,000.
Gross vs. net income
While gross income is the amount your business earns from sales before subtracting expenses, net income is the amount your business earns after subtracting expenses. To calculate net income, deduct all expenses from the gross income, including taxes, utilities, marketing, and employee wages.
Let’s look at the gross income example above. Your business earned $250,000 in total sales in the first quarter and the COGS was $100,000, resulting in a gross revenue of $150,000. Let’s say your business also had another $75,000 in expenditures. Subtract these from the gross revenue to calculate net income.
$150,000 – $75,000 = $75,000
Your business’s net income for the first quarter was $75,000.
Keep track of your business’s income and expenses by using Patriot’s small business accounting software. It’s designed for non-accountants, so you can easily manage your business’s finances yourself.
This article is updated from its original publication date of 9/28/2015.