- Your annual income is the amount of money your business earns from sales for one year; does not include costs and expenses.
- To calculate your annual income, multiply the quantity of each product you sold by its selling price, and then add the annual sales of each product to determine your gross annual income.
- Annual revenue includes operating income and non-operating income, which have several subtypes.
- This article is intended for small business owners who need to calculate their annual business income.
It takes a lot to determine the financial health of your business, but knowing how much money you are making from the goods and products you sell is a good place to start. Without knowing how much money you are contributing, you will not be able to say if your business is profitable. To have a firm starting point from which to determine whether your company’s sales actually exceed its costs, you must calculate and analyze your annual revenue.
What is the annual income?
Annual revenue is the total amount of money a business earns during a given 12-month period from the sale of products, services, assets, or capital. Annual income does not represent any of your expenses. For this reason, the term “sales” is often used to indicate income in income statements.
Importantly, income and earnings are not the same. Profit is the difference between income and costs. Therefore, when the term “annual income” is used for business purposes, it means gross annual income rather than net business income, which is the money left in your business after subtracting costs from your sales.
Key takeaway: Annual revenue is all the money your business earns from sales activity during a given year before costs and expenses are subtracted.
How to calculate annual income
To calculate your annual income, you need to know the prices at which you have sold items and the quantity of each item that you have sold. You can calculate your annual income with this formula:
Annual revenue = Sales price x Number of items sold
For example, let’s say you sell project management software with an annual subscription price of $ 100. If you sell this software to 2000 customers in a year, this is your annual revenue from the software:
$ 100 x 2,000 = $ 200,000
If you also sell a level of premium software for $ 150 to 500 customers during the same year, here is your annual revenue for that product:
$ 150 x 500 = $ 75,000
As such, your total annual income is $ 200,000 + $ 75,000 = $ 275,000. However, this number shows only a partial picture of your company’s finances. [Looking for help tracking and analyzing your business finances? Check out our reviews of the best accounting software for 2021.]
TILT: To calculate your company’s annual revenue, multiply the quantity of each product, service, or asset that you have sold by its selling price, and then add these items together to get your total annual revenue.
How to distinguish net business income from gross annual income
In the project management software example, your company’s gross annual revenue is $ 275,000. This number is not the amount of cash your business has available or awaiting payment of accounts receivable. To calculate this number, which is your net business income, you will need to incorporate your costs of sales into the calculations above.
Let’s say your company spends $ 15,000 per year to maintain the back-end of your project management software: servers, information, cyber security, hosting and more. It also pays your team of four (including yourself) a total of $ 200,000 in salaries, with another $ 20,000 spent per year on a third party customer service call center. Your other annual expenses – including rent, utilities and interest on business loans – total $ 12,000. This would be the equation for your net business income:
$ 275,000 – $ 15,000 – $ 200,000 – $ 20,000 – $ 12,000 = $ 28,000
As you can see from this example, there can be a large gap between annual gross income and net business income. In fact, your net business income can be negative, meaning your operations cost you more than you earn from them. This situation requires immediate attention, as a business with costs that consistently exceed its revenue is likely to fail.
Did you know: To distinguish your annual gross income from your net business income, subtract all of your operating costs from your sales.
Types of income
In addition to your annual gross income, you may want to calculate your annual income for various categories of sales. There are two main types of income: operating and non-operating income.
Operating income is the money your business earns from its core business (i.e. sales). In the project management software example, all sales for the two software tiers are considered operating income.
Non-operating income is the money your business earns from non-sales activity. This category of income may include:
- Sale of assets and capital. If you sell a machine that you no longer use to another company, then the sale price is part of your annual non-operating income.
- Dividend income. If your company invests in shares of another company, the earnings you make from this investment are dividend income that is part of your company’s annual non-operating income.
- The return on an investment. If your company offers a loan with interest payments or you invest your cash in the stock market, the money you make from these transactions is part of your company’s annual non-operating income.
- Rental income. If you rent property or equipment Elsewhere, the amount you receive from these rentals is part of your annual non-operating income.
- Against income. Unlike the other non-operating income, the contra income always has a negative value. This is because offsetting income reflects depreciation – invoices that are not paid or inventory that is not sold.
Whether you are calculating your annual income for operating or non-operating costs, the same principles hold true: multiply the items sold by their price, then subtract all the costs involved to find your net business income. With careful calculation that adheres to the above principles and tips, you can gain a meaningful picture of your business and potentially remain profitable for years to come.