You need to have a developed understanding of both net and gross income if you want to be able to keep an eye on how your business is performing financially.
This guide will help you to learn about these terms, as well as other key information you’ll need, so read on for more details.
Gross income vs net income
Understanding the differences between these two business terms is highly important for small business owners. The easiest way to spot the main differences is by learning what each of them actually mean.
What is net income?
Net income is highly important to all business owners, and your understanding of it is essential. Your net income simply refers to your total earnings. This can also be called profit, and if your net income rises, it is a positive thing, not only for you, but also for your shareholders and staff members.
You can use this formula to calculate your net income:
Net income = Gross income – total expenses
What is gross income?
Your gross income is your net sales revenue minus your COGS. You should aim to maintain a high level of gross profit, so that your business venture has more available cash to invest in certain areas or pay off liabilities. If you ever find your gross profit levels to be falling, you should look for cheaper ways to run production, such as using more affordable materials for the creation of your products or services.
You can use this formula to work out your gross income:
Gross income = Gross revenue – COGS
When studying your gross income vs your net income, it is essential that you realise these figures are telling you different things about your company. Although gross income awards you with insight into your business venture’s overall ability to build revenue, net income gives you a clearer picture of your organisation’s overall profitability.
Understanding that you are gaining different information from the two business terms is an important first step in recognising how financially healthy your business truly is.
Gross and net income – business and personal
Both gross and net income do not solely apply to business finances but are sometimes also used to describe a person’s salary. In this situation, gross income would be the baseline salary, and net income would refer to the take-home pay after deductions. The deductions included here will be things like tax, pension contributions, national insurance payments, and so on.
Even though we are focusing on business finance today, it is useful for you to get a firmer grip on its relation to personal finances too. You can calculate your gross salary and work out the net amount you will be taking home with you during each tax year. Remember, the basic rate you earn doesn’t always tell the full story.
How to convert net to gross income
Now that you understand the differences between net and gross income, you can begin to consider how you might turn net to gross income. This is a useful tool for business owners of all shapes and sizes to have in their arsenal. Basically, all you must do is work backwords from your venture’s net income. Hence, you can begin to convert net income to gross income by utilising the following formula:
Net income + Total expenses = Gross income
If you would prefer to convert net income to gross income in relation to your salary, there are many online gross to net income calculators you can use online. Spend a few minutes researching and looking around the web, and the answers you need will be with you in no time.