Everything you need to know about your income.
What is the difference between Gross Revenue, Gross Margin and Net Income? Why are they so important? What expenses belong in each category and how exactly does it all work? Keep reading, because we’re here to break it all down.
Let’s discuss Gross Revenue vs. Gross Margin vs. Net Income.
Gross revenue is the total amount of revenue that your business earned. Think of it like the total you billed, or the total you collected. Some people call it total sales or revenue or even just sales. Gross revenue is the very top-line number on your income statement before subtracting out any costs at all, whatsoever.
Nothing gets subtracted from gross revenue—not even sales discounts, returns, or even other allowances granted to customers.
Gross margin is the total amount of your income after some expenses…but not all. The term “gross margin” is interchangeable with gross profit, by the way. Gross margin is generated from the sales of your business with the deductions of some discounts, returns, allowances, and cost of goods sold (COGS). Your COGS are also known as your direct costs. You can read more about direct vs. indirect costs here.
What exactly does this mean? Let’s say that your business has a gross revenue of $1 million. However, your business didn’t earn an income of $1 million because it had $100,000 in discounts and $250,000 in COGS. As a result, the gross margin is $650,000.
Here’s the math: $1 million in gross revenue – $100,000 in discounts – $250,000 in COGS = $650,000 in gross margin
So, we know that gross margin already takes discounts, returns, allowances, and COGS into consideration, but let’s be honest: Business involves a lot more expenses than just the cost of goods sold. What about overhead, accounting fees (insert shameless plug), and salaries, just to name a few?
But wait, there’s more!
What about the money you spent on marketing and advertising? Or about the traveling your team did? And what about the trade shows you attended or your employee’s benefits? What about client-related expenses? Will someone think of the client-related expenses?!
When you take into account all of these damn expenses, then you get your business’ net income. Here’s the math: Gross margin – total expenses = net income
Let’s use the figures from our example above again. If your total expenses were $400,000, this means that the net income from our example above comes out to $250,000.
Again, here’s the math: $1 million in gross revenue – $100,000 in discounts – $250,000 in COGS – $400,000 in total expenses = $250,000 in net income
Whew! We know those are a lot of numbers, but don’t freak out. Talk with your CPA to get it sorted out.
- Gross revenue: the sum of every dollar earned before any expenses or adjustments.
- Gross margin: the money earned while considering the adjustments and direct expenses (COGS) related to that money. While some expenses are factored into gross margin, it doesn’t take into account all expenses.
- Net income: the income left over after all expenses. Just remember, net income is when you take your total revenue and subtract your total expenses.
One of our favorite quotes is “Revenue is vanity, profit is sanity.” It’s not just what you earn, but what you keep, too.
Please reach out, we’d love to help!
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Countless assumes no liability for actions taken in reliance upon the information contained herein.