What are gross and net income? Definitions, examples and calculations
Net and gross income are two ways to determine what your business earns. Understanding the difference is crucial to maximise profitability — it helps you gain insight into what you're spending, what you're earning and what's driving profits. In this guide, we look at gross and net income definitions, how to calculate your figures, and examples from other businesses.
What is gross income?
Gross income — sometimes called gross profit or gross margin – is the total income your business generates over a set period minus the cost of goods sold (COGS), also called cost of sales (COS). Unlike gross revenue, which includes all income without deductions, it accounts for the costs associated with buying or producing products or services.
Knowing what falls under COGS is key to understanding gross income. COGS includes all direct costs associated with buying or producing inventory or services – for example, raw materials, direct labour, packaging and purchasing products to resell. It doesn't include business costs, like indirect labour, marketing, leasing property or distribution.
Why is gross income important in business?
Gross income is important in business for several reasons:
It gives you a broad overview of the money flowing into your business.
Comparing gross income with net income gives you insight into how day-to-day costs impact profits, helping you identify overspending, find savings opportunities and ultimately, boost profitability.
It can also be a way to assess market share and benchmark your business against others in your sector. By looking at your gross sales as a proportion of sales in your sector, and your gross income compared to others, you can find ways to boost your market share, work out whether you’re overspending or undercharging, and gain sight into your sales performance.
How to calculate gross income
Calculate gross income by figuring out the total cost of goods sold (COGS) and deducting that cost from your gross revenue (that is, all your earnings) for the chosen period. Remember to include all the costs associated with producing your product – like materials, labour, packaging and import costs.
Gross Revenue – COGS = Gross Income
What is net income?
Net income is the income the business generates once all expenses have been subtracted. It’s a summary of the income left over once you remove all the costs of running a company and manufacturing or importing your product. Because the COGS has already been removed from gross income, calculating net income only requires deducting other business expenses, including marketing costs, rent or mortgage, payroll for staff not directly involved in production, and other business overheads.
Why is net income important in business?
Net income is important in business for several reasons:
Tax
In Australia and New Zealand, tax is calculated based on your total assessable income, minus eligible business expenses. Net income after tax is the amount of profit a company makes.
Profitability
While gross income includes total sales and revenue from other sources, it doesn’t account for expenses involved in running a business. Your net income lets you work out how much profit you’ve made in a given period, compare it to other sales periods and report back to your management team or shareholders.
Decision-making
Changes to net income can indicate issues in the business. For example, if profitability unexpectedly slumps, it’s a sign that you need to take action. For example, you may need to raise prices, reduce overheads or pull another lever to generate additional sales and get back on track.
How to calculate net income
Calculate net income by deducting operating expenses from your gross income. Remember to include all costs associated with running your business but not costs associated with producing your product – these have already been deducted in your gross income calculation.
Gross Income – Operating Expenses = Net Income
Key differences between gross and net income
The key differences between gross and net income are:
Deductions: gross income is your total sales figure minus the cost of goods sold (COGS), while net income includes deductions for other operating expenses.
Purpose: gross income is useful for assessing your market share, while net income is used to analyse profitability and tax owed.
Why are gross and net income important to your business?
You can use gross and net income to measure costs, assess profitability, and track changes to your income over time. They’re also part of the standard business balance sheet, so should be tracked as part of your business accounting.
Gross income and net income FAQs
Are net income and taxable income the same?
Net income and taxable income are the same – the amount left over once all expenses related to production and business operations have been deducted.
How do I improve my net income?
You can improve your net income in several ways, depending on the drivers behind your current expenses:
Reducing your operational overheads – for example, shifting to cheaper premises, changing insurance providers or reducing marketing costs
Decreasing production costs – for example, switching to a cheaper supplier for raw materials or automating your factory floor to reduce labour costs
Increasing prices – while risky, raising prices helps boost net income and profitability.
What can cause a decrease in net income?
A decrease in net income can be caused by external factors like the rising cost of raw materials, imported products, packaging, leasing, marketing and insurance without a corresponding rise in your product prices.
Even small increases across a few areas can have an impact. If your insurance costs, rent, materials and shipping costs all increase by just a couple of percentage points, it will show up in your net income calculation.
A decreased net income can also result from internal factors like reduced productivity, increased staffing costs or rapid business growth. For example, if you open a new store in a sales period, those costs could eat into your net income before the new location starts to bring in sales.
Get your head around gross vs net income with MYOB
Unfortunately for new business owners, business accounting is a complex beast. Gross income vs net income is just one example of confusing terminology that can be difficult to understand – particularly if you’re busy running your business.
MYOB’s accounting software makes calculating gross and net income, and everything else, as clear and simple as possible. Designed for small to medium-sized businesses in Australia and New Zealand, MYOB helps you track income and expenses, create profit and loss statements, manage GST and tax reporting, generate management reports, and much more.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.