Business owners would do well to understand the intricacies of their business finances, including cash flow, profit, loss, and revenue. If you’re not sure how to measure your business revenue, this article will help.
What is annual income?
Your business’s annual revenue, or annual sales, is the total amount of money it earns in a year. You can measure this year as a calendar year or a fiscal year, depending on how you do your accounting.
Revenues do not take into account expenses and are different from profits.
Revenue vs net profit
You may hear the terms “income” and “net income” and think they can be used interchangeably, but that’s not the case.
Gross income includes all the money you earn from sales. Net income is this number minus any fees you had or discounts you gave when selling the products
Net income is what is left after subtracting from net income the cost of goods sold, operating costs, and all fixed and variable expenses that go into producing a product. In financial reports, you will see these numbers on your income statement.
Why is annual income important for small businesses?
Knowing your annual turnover is essential for your business for many reasons. First, comparing this year’s earnings to last year’s can help you see if you’ve done better or worse comparatively. This comparison metric can help you make decisions about your sales strategy, such as increasing sales prices if revenue is down.
And if you plan to apply for small business loans now or later, you’ll need to know your annual income figures, as lenders use them as an indicator of how likely you are to be able to repay a loan.
How to Calculate Annual Income
To calculate your total annual income, simply look at property sales over a year. If you don’t have this number, you can look at the number of products you sold in a year and multiply that number by what you charged for those products. This will give you your gross turnover.
Here is an example to help you learn how to calculate annual income. Let’s say you are selling candles at $10 each. Last year you sold 30,000 candles. To find your gross income for the last year, you would multiply the candles sold by their price:
30,000 x 10 = $300,000
If you want to calculate your net sales, subtract the cost of goods sold and any discounts you gave. Let’s say you had $75,000 in discounts and cost of goods sold. This means that your net income is:
300,000 – 75,000 = $225,000
If you use accounting software, you can see your annual (or monthly, if that’s what you’re looking for) income in your income statement, as well as in other financial statements.
Types of income
There are two types of income (or income): operating income and non-operating income.
The sale of products or services is considered operating income. It’s the main thing you sell, whether it’s candles, cars or advice.
There are also several types of non-operating income you may have. If you sell assets, you will generate revenue from that sale. Depending on your sources of income, you might see income from the interest you earn on debt securities (in case you loaned money to another entity, which pays back the loan and the interest).
You may also receive rental income if you own property that you rent out. And if you own shares of other companies, you could also receive dividends as a form of income. These are all considered off-farm products.
How to report income on funding applications
I mentioned that you need to know your annual income if you are applying for small business loans. This may also be the case if you are applying for business credit cards, commercial real estate loans, or lines of credit.
Each lender will have different requirements. You may be asked to provide detailed financial statements (particularly if you are applying for a bank or SBA loan), or you may just need to enter your income figures into the application.
Some lenders may require you to make a certain income to qualify for a loan.
Understanding your business revenue can help you become a more savvy business owner. Measuring revenue growth (or loss) can be helpful in developing a long-term financial plan for your business. You can decide to expand into other products, raise prices, or retire a product line, depending on what your revenue numbers tell you.
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