Comparison of Business Income & Operating Expenses
As a business owner, you can glean valuable insights about your company's operations by comparing its income and its operating expenses. This comparison can show you whether or not you are making a profit, as well as whether you are spending too much on particular types of expenses. Stay current on your bookkeeping to maintain an up-to-date picture of the relationship between your income and your operating expenses.
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Comparison of Gross Business Income With Operating Costs
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Your gross business income is the total amount that your company takes in as payment for the products and services it provides. It costs money to operate a business, so you must subtract your operating costs from your gross business income to determine how much your company has actually earned. If your gross business income exceeds your operating costs, then your business is earning a profit. If your operating costs exceed your gross business income, then your business is losing money.
Comparison of Net Business Income With Operating Costs
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Your net business income, or profit, is the amount that your business has earned once you subtract your operating costs from your gross sales income. For most businesses, operating costs exceed net income, but this isn't cause for concern as long as there is enough net income to pay the owners or shareholders. Assuming that a company's gross profit does not change, then the lower its operating costs, the higher its net profit. In other words, the less a business spends to transact a particular volume of business, the more it actually earns.
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Comparison of Business Income With Particular Operating Costs
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It can be useful for a business to compare particular types of operating costs with its gross business income. Different types of businesses have specific targeted ratios that indicate whether a company is operating sustainably. For example, the typical food business should spend no more on ingredients than one-third of the amount it takes in through sales receipts. In other words, a restaurant that grosses $6,000 per week should spend no more than $2,000 per week on ingredients.
Owner Income as an Operating Cost
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Depending on a company's legal structure and bookkeeping system, its owner's income may or may not be included in its operating costs. A corporation pays a salary or wage to owners who work in the business, but for many sole proprietorships, the owner's income is the same as the net profit. Either accounting method is legitimate as long as you keep in mind when evaluating net profit whether or not the company's operating expenses includes its owner's income.
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References
- Photo Credit diagram of profit image by NatUlrich from Fotolia.com
