The Business Income
Tracking your income is important. You do want to know how much you make, and how much you should be taking in. This is your revenue. It is the sum of all of the money that you take from your clients, before taxes. Your revenue is not your actual income, since it does not yet account for the costs of running your business. It is simply the money you take in, whether it be cash, cheques, credit cards, or on invoice to your clients. Add these all up and you have your total revenue. Some businesses will count this with sales taxes, but that is incorrect and sales taxes need to be accounted for separately.
The Costs of Running Your Business
The costs associated with operating a business are called the expenses. These are any cost that is required to make the business work and are associated directly with the business. It is your payroll expenses (including any benefits and government taxes that the business is responsible for – not the employee deductions that are taken off their cheques). It is the rent and operating expenses of your building or office. It is the cost of all the goods you produce or sell. It is also the costs of advertising, licensing, cleaning, and so-forth. These all together make up your expenses.
Direct expenses are those that can be tied directly into the sale of your product or service, whatever it might be. These could be the wholesale cost of a product (or its manufacturing cost), commissions on selling the product, and any maintenance and repairs needed on a product before it is sold (say it was damaged on your sales floor and you had to fix it). Once you subtract the direct expenses from your revenue, then you are left with your Gross Income. This means your income before your indirect expenses.Indirect expenses are those that cannot be tied to the product itself. These can include your rent, professional fees (lawyer, consultant, accountant), administrative salaries, sales promotions and advertising that are general to the whole business (rather than one specific product), and so forth. Once these are accounted for, you should have all of the expenses of your business and any amount that is left over on your Income Statement is your Net Income (or Loss). Don’t feel bad if you are just starting out and there is a loss. It’s quite common to have a loss in the first couple of years of a business, but to have a loss past three years is something you seriously need to look at.