a picture of gross income

The distinction between net and gross revenue is crucial to grasp. It is the only method to enable small company owners to understand how their businesses generate money. It affects budgeting and planning. Without distinguishing between net and gross, managers cannot be sure whether sales or expense reductions result from greater profitability. 

What is gross revenue?

Gross revenue is the sum of expenses made by the firm. For example, the costs of the items sold added up, or fixed expenses such as pay for administrative employees.  In essence, a company’s gross revenue is equal to its overall revenue over a certain period. 

Importance in the business of gross revenue 

In managing the finances of their enterprises, owners have to generate their sales on a weekly, quarterly, or annually basis. This enables managers to monitor the growth of different goods and services (or their contraction). 

When corporate owners check their income across several periods, they must do so before subtracting any costs. Only in this method can they track their sales, average sales, and seasonality over time. 

To assess gross income, it is also necessary for managers to monitor staff sales targets and productivity requirements. In contrast to profitability, gross income helps managers track the sales of a company. 

Example of gross income

Imagine a retail apparel business selling garments for $250,000 in a quarter. That $250,000 equals the shop’s gross income for that quarter before expenditures. 

The gross income of a company is pretty simple. It corresponds to the overall sales of the firm during a period. Gross revenue utilizing off-shelf accounting software is incredibly straightforward to report – all managers report the total money collected over a certain period. 

What’s net revenue? 

Net revenue is the amount of money a business generates for all costs incurred during the same term over a period after it accounts – rather than income. Without determining net income, company owners have no way to determine if they did indeed make or lose money over a certain period regardless of the amount they sold on the goods and sales. 

Importance of business net income 

To measure a company’s profitability, net income is highly essential since it accounts for not only sales but also expenditures incurred in the same period. 

In addition to gross income, companies need to track net to assess their profitability over time rather than just their income (total sales). Net income also allows firms to measure their profit margin – in other words, how much the company earns for every $ of sales. Net income is a proportion of gross income. 

Most significantly, net income calculation helps managers and small company owners decide how to increase profitability and improving cash flow by increasing sales or lowering costs. 

And – probably MOST – net earnings constitute a significant measure of calculation and tracking by business owners because they are taxed.