The direct cost of building products or providing services is among the most important metrics any business can measure and analyze. Gross income is the simple and effective metric businesses use to track the profitability of their primary revenue source — sales of products and services. By calculating and then analyzing gross income, businesses can see exactly how much of their revenue goes to pay for producing their goods and services and how much can be used for other purposes, from investing in a new storefront to buying pencils for the accountants. Analyzing gross income can lead to opportunities to make improvements that can not only maintain profit margins, but also expand them.
What Is Gross Income?
Gross income, also known as gross profit, is a business’s total revenue from sales minus the cost of goods sold (COGS) or cost of services (the rest of this article refers to COGS, only, to keep it simple). It shows the profitability of a company’s core operations in a given period before expenses by focusing only on direct costs, such as factory production, labor and raw materials. It ignores indirect costs, such as sales, marketing, administrative expenses, taxes and interest payments. By monitoring gross income, business leaders can gain important financial insights, including how costs are changing over time, the impact of pricing changes and more. These insights help leaders craft more effective strategies to increase revenue through operational efficiency, better serve customers and remain agile in the face of evolving economic conditions.
Gross income is one of several profit calculations used by business financial teams to analyze profitability at different business levels, alongside operating income and net income. All three of these metrics can be calculated from information typically found on a company’s income statement, a key financial document. This statement provides a detailed breakdown of all of a business’s incoming revenue and outgoing expenses. Gross profit is usually found near the top of the income statement, just below sales/revenue and COGS. Large and public companies regularly publish their income statements, along with other financial reports. But most companies could benefit from regular internal reporting and analysis of their finances.
It’s important to note that there’s a separate definition of gross income referring to an employee’s wages before taxes and other deductions are subtracted. This term, also known as “gross pay,” is also important for businesses, but this article focuses on the gross income shown on a company’s income statement.
Key Takeaways
- Gross income is a fundamental financial metric that reflects the profitability of producing a business’s goods and services. It considers only the direct costs of production, ignoring all indirect and ancillary expenses.
- Businesses can calculate gross income by following a simple formula: Subtract the cost of goods sold from revenue.
- The higher the gross income, the more money businesses have available for other uses, such as operating costs and reinvestment.
- Accurately reporting gross income helps businesses find areas to reduce costs and improve profitability. It also helps companies maintain financial integrity and compliance with regulations, and provides financial transparency to stakeholders.
Gross Income Explained
Staying competitive and profitable is more challenging than ever for modern businesses, whose customers have nearly unlimited electronic information at their disposal with which to compare features, quality and pricing. At the same time, global supply chain disruptions have led to several years of rapidly fluctuating materials costs in construction, plastics, building materials and other supplies, according to International Monetary Fund data, leaving businesses with volatile costs and no obvious way to maintain consistent gross margins (the ratio between revenue and the amount left over after subtracting COGS).
Source: International Monetary Fund data retrieved from FRED(opens in a new tab), Federal Reserve Bank of St. Louis, January 23, 2024.
Continuously analyzing gross income can help businesses stay on top of cost volatility and take action to preserve their profit margins. While gross profit is not a business’s final measure of profitability — that would be net income — it provides crucial insights for assessing financial performance. If gross income isn’t high enough to cover operating expenses and other obligations, businesses must find ways to reduce costs or increase revenue. Otherwise, they may not be able to continue operating without incurring losses.
Despite their differences, both income measures are found on a company’s income statement; gross income is toward the top, while net income occupies the statement’s bottom line, as shown on the simplified sample income statement below. The distinction allows financial statement readers to get a picture of how profitable the company’s core operations are as well as the company’s bottom-line profitability.
How to Calculate a Business’s Gross Income
Precise, current data is needed to accurately measure gross income and get the most out of analyzing it. Inaccurate figures can misdirect strategies, potentially leading to decisions that diminish revenue, such as reducing prices on already low-margin goods. Conversely, outdated data may result in sluggish responses to market changes, giving competitors the opportunity to seize the upper hand. To mitigate these risks, many companies rely on accounting software or a larger enterprise resource planning (ERP) platform to automate and expedite calculations, minimize errors and speed up report generation. This enables more frequent and rapid financial performance reviews, more effective trend analysis and earlier identification of potential issues.
The gross income formula is:
Gross income = Revenue – COGS
The calculation begins with all revenue from product sales. Then, subtract all direct expenses from that revenue to obtain gross income. To illustrate, consider a furniture manufacturer that sells tables. Each table costs $120 to produce and sells for $200, and the manufacturer sells 500 tables in a typical month. The gross income calculation would look like this:
Gross income = $100,000 ($200 x 500 tables) – $60,000 ($120 x 500) = $40,000
Gross income = $100,000 ($200 x 500 tables) – $60,000 ($120 x 500) = $40,000
This $40,000 can then go toward sales commissions, insurance, taxes, reinvestment for growth or distribution to owners/shareholders.
This, of course, is a simplified example. Normally, a manufacturing company, for example — especially one that produces multiple products — would find that calculating the cost of goods sold is a complex challenge requiring accounting, procurement and inventory management expertise.
Gross Income vs. Net Income
Gross income and net income are both critical financial measures that illuminate different aspects of a business’s financial strength. Gross income is a narrowly focused metric, showcasing only the profitability that results from deducting the direct costs of producing products from the value of the sales those products generate. Conversely, net income considers all business expenses incurred during the financial period, including taxes and interest, as well as ancillary, nonproduct revenue. Because of net income’s all-inclusive nature, many parties — including both internal analysts and external lenders and investors — view it as the ultimate measure for the full picture of a business’s profitability.
| Gross Income | Net Income | |
|---|---|---|
| Includes | Revenue from product sales and the direct cost of producing the goods sold. | Total company revenue and all expenses, gains and losses. |
| Formula | Product revenue – COGS | Total revenue – All expenses, gains and losses |
| Primary Uses | To assess the direct profitability of products and services for consideration in pricing, sourcing and manufacturing decisions, as well as investment decisions. | To assess a business's overall financial health for internal management decisions and for external decisions by investors, creditors and potential business partners. |
| Location | Near the top of the income statement. | It's literally the bottom line of the income statement. |
Why Is Gross Income Important for Businesses?
The core driver of revenue for a business is selling its goods and services to customers. Inefficiencies at this step echo throughout a company’s finances and can have a major impact on the business’s ability to pay its bills and grow. Because gross income shows the efficiency of these primary operations, it acts as the foundation upon which the rest of the business’s performance is built. Here are three ways businesses can assess the strength of that foundation.
Financial Analysis
Gross income is a useful metric for financial analysis as it directly evaluates the return a business earns by selling goods and/or services. For example, if a business is investing $100,000 in inventory, but only earning $5,000 in gross income, that disparity may signify that there are opportunities to reduce inventory costs to increase gross income, such as analyzing inventory carrying costs, including shrinkage and storage. External analysts also use gross income as a baseline for comparing profitability among different companies in the same industry, across different financial periods or against industry benchmarks. Such stakeholders use this data to identify trends and assess how the viability of current operations has changed over time. Companies Businesses can also study gross income to assess the impact of new product launches or production processes.
Business Decisions
By comparing gross income to other profitability metrics, such as operating or net income, decision makers can see what percentage of revenue is going toward producing sellable goods and services and what fraction is going toward operating and ancillary expenses, such as administrative, nonproduction payroll and office supplies. These indirect expenses are often easier for businesses to fine-tune than COGS, which typically rely more on material suppliers and other external market forces. And, changes to COGS can impact the product itself, for example in size or quality, which can be visible to customers and cause revenue challenges. Business leaders can use these metrics to inform operational strategies and find targeted areas to reduce costs and, ultimately, increase profit. Tracking gross income metrics over time can also improve forecasts, helping businesses make better budget choices and adapt to evolving market conditions.
Reporting
Residing in the first section of the income statement, gross income introduces stakeholders to the first measure of a company’s financial health, providing a view of sales performance and profitability. This helps both internal analysts and relevant external parties to gain context for all the financial data that follows, especially when juxtaposed with key financial ratios, such as operating and net profit margins. Clear and accurate gross income reporting demonstrates compliance with relevant financial regulations and helps businesses maintain integrity and trust with all external stakeholders.
Examples of Gross Income for Businesses
To illustrate the nature of gross income, consider the following two fictional examples.
A hypothetical electronics manufacturer, Carrie’s Computers, earned $125,000 from sales revenue last month. To create the inventory that was sold, however, it spent $50,000 on raw materials, factory labor and other direct costs. By subtracting COGS from total revenue, the company’s accountant calculates a gross income of $75,000. Some of this income was spent on operating costs (sales, marketing, shipping to customers, utilities and office rent) and the rest was reinvested to begin development of a new product line.
Over the same month, another electronics seller, Everett’s Electronics, earned $150,000 from sales. The company uses premium materials, leading to a COGS expense of $80,000 and gross income of $70,000 ($150,000 — $80,000) for the period. Through comparative analysis, Everett, the owner, realizes that his higher expenses led to $5,000 less in gross income than the competition, Carrie’s Computers, despite stronger sales. To improve margins, the business must make a choice: Switch to a more affordable supplier or raise prices. Through customer feedback, Everett knows that his customers value higher-quality goods over lower prices — within reason — so he opts to keep the high-quality materials and raise prices to increase profits instead. However, during this analysis, some inefficiencies in the manufacturing process are identified and streamlined to reduce costs, creating an even larger profit gain than raising prices alone.
Calculate and Track Gross Income With NetSuite Accounting Software
Effectively tracking a business’s profitability can be a time-consuming and challenging process. And delays between data collection and decision-making can lead to missed revenue opportunities or a lag when addressing costly inefficiencies. But with NetSuite’s financial management software, businesses can manage all their financials in one place. NetSuite’s cloud-based ERP solution leverages automation tools to quickly and accurately generate financial reports based on the most current data available. With real-time visibility into financial performance, including gross income, NetSuite empowers businesses to make informed decisions quickly when market conditions are evolving rapidly or when new strategies are affecting business performance.
With NetSuite’s intuitive and customizable dashboards, business managers can access all the data they need via customized financial metrics. The insights such custom metrics produce can help business leaders proactively manage both focused and broad financial strategies. Additionally, NetSuite’s comprehensive platform gives decision-makers the transparency they need to drive profitability, wherever and whenever they need access. With NetSuite, businesses can close with confidence and report with accuracy, ensuring that every step they take aligns with overall business goals.
Gross income is more than just a number on an income statement; it’s a reflection of a company’s core revenue-generating activities and a starting point for strategic financial planning. Analysts use this measurement to identify changes in direct costs, inform pricing strategies, run comparison analyses and more. By understanding and effectively managing gross income, business leaders can find areas to increase their profitability.
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Gross Income FAQs
What is net vs. gross income?
Net income is the profit a business makes after all expenses are subtracted from total revenue. Gross income is the revenue from product sales minus only the cost of goods sold. Both are found on the income statement, with gross income near the top and net income at the bottom.
How is gross income different for individuals vs. businesses?
For individuals, gross income is their total wage earnings before subtracting taxes and other deductions. For businesses, it refers to the revenue left after deducting the cost of goods sold from product sales.
What is the difference between gross income and salary?
Salary is the payment workers receive from employment. Gross income, on the other hand, encompasses their entire earnings and includes salary, bonuses and any other additional income. Both are the totals before subtracting taxes and deductions.
How do operating expenses affect net income?
One of the main formulas business accountants use to calculate net income is to subtract operating expenses, including costs such as rent, utilities and administrative payroll, from gross income. The higher the operating expenses, the lower the net income. But net income calculations also consider other, noncore expenses, such as taxes and interest payments, as well as gains and losses from investments and other ancillary activities.
What is the gross monthly income?
Gross monthly income is the total monthly revenue from sales, minus the cost of the goods sold over the monthly period. These costs include raw materials, manufacturing labor and any other direct costs.
What is the net salary?
Net salary is the amount of money an employee takes home after all deductions, including taxes and Social Security contributions, have been subtracted from the gross salary.
What is your net income?
A business’s net income is the profit left over after all expenses and obligations are paid. This money can be reinvested into growth, paid out to owners or used however the business chooses.
