Gross vs Net Income
If you’re a business owner looking to get a better understanding of your finances, learning the difference between gross and net income is a good place to start.
In this article we explain gross and net income and provide simple formulae for converting one into the other.
What’s the difference between Gross and Net Income?
Essentially, Gross Income tells you how much revenue you are bringing in from your sales. Gross income gives you a picture of your business’s revenue generating power.
Net income, on the other hand, is a calculation of your business’s revenue minus all expenses. Net income will reveal your business’s profitability in much greater detail.
Both are useful in different situations, depending on what you want to do. So let’s take a closer look:
What is Gross Income?
Gross income is the total amount of income that your business has gained over a set time period, with only the cost of goods sold (COGS) subtracted.
COGS are the total cost of all the things directly related to providing the goods and/or services sold by your business. For example, the cost of manufacturing, packaging, logistics, and salaries of factory employees would all be included in COGS. But indirect costs such as marketing expenses would be excluded.
This is the formula you can use to calculate Gross Income:
Gross Income = Gross Revenue – COGS
What is Net Income?
Net income on the other hand, is the final profit your business has made after you have counted all the other expenses in your business and subtracted them from your Gross Income.
These expenses would include your marketing costs, payroll for all employees not directly involved in manufacturing, and any business overheads. You would also factor in general and administrative expenses, operating expenses, depreciation, interest, and taxes paid.
Here’s the formula for calculating Net Income:
Net Income = Gross Income – Total Expenses
How to convert Net Income into Gross Income
It’s simple to convert Net Income back into Gross Income, all you need to do is take your Gross Income and add all the business expenses back in.
The formula would look like this:
Gross Income = Net Income + Total Expenses
Gross and Net Income for personal usage
These terms are also both used to work out your salary, in which case Gross Income means your total salary while Net Income is your take home pay after factoring in how much tax you’ve paid.
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