What is the Difference between Income and Profit?

As you see your business generate money throughout the year, it can feel good to see that your business is succeeding. But, don’t be fooled by assuming that you can do whatever you want with the money in the bank. It is important that you understand the difference between income and profit so that you can manage the cash flow for your company. It is important to keep and maintain your record. It us recommended to do a review or to get with your accountant every month. If you are meeting with your accountant it doesn’t have to be face to face. A quick phone call or even in a virtual meeting such as GoToMeeting or Google Hangouts works well. This way you can view financial statements and go over things so you know where your money is going, before it becomes a bigger problem.

If you don’t have an accountant you can give us a call at  (888) 620-0770 and we would be happy to talk to you or you can do a quick Google search for “accounting for small business” etc, but make sure you read the reviews and make sure to ask them questions about your type of business and obviously make sure they are a good fit for your business.

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Income vs. Profit

The terms “profit” and “income” are often used as synonyms, but you need to distinguish the difference between these two numbers. Income is the top-line revenue. This number is calculated by tallying every penny that came into the company during a given period. Income is commonly referred to as “Gross Revenue.”

On the other hand, profit is the amount that is left over after the expenses have been paid. To calculate this number, figure out your gross revenue and subtract the cost of goods that were sold as well as the expenses. Profit is also often called “Net Revenue.”

Why You Need to Know the Difference

Why does it matter if you know the difference between income and profit? It comes down to cash flow and financial decisions. For example, you might look at the income number without considering upcoming expenses, and mistakenly spend the money on something without saving enough to cover bills that are due. This problem commonly happens with tax bills or the cost of inventory management.

When the money hits the bank account, then business owners make the mistake of making business decisions based on the current balance instead of planning for the future.

Working with Your Accountant

Before you make any sizeable financial decisions, it is important that you consult with your accountant about the financial health of your company. Together, you can analyze a Profit and Loss Report to get a feel for the way the money is flowing through your company. This financial strategy is essential to ensure that you have the cash flow to pay for future capital expenditures, payroll, or perhaps an upcoming tax bill.

Ongoing financial record keeping is critical so that you know that your P&L report is current. Make sure that you are staying consistent with tracking all of your company’s income and expenses throughout the year.

At Easier Accounting, our goal is to simplify the accounting process so that you can focus on the other responsibilities of owning a business. Contact us to learn more about how our team can help your company: (888) 620-0770