Gross income: definition, formula, and how to calculate it?

Every company wants a healthy gross profit.

It illustrates the efficiency of your company, which helps you when you want to trade with your international partners.

Gross income also reveals the profit or loss generated by your products so you can review what works and what doesn’t.

However, people often mix up gross income with net income, as both describe profits. But they are two different things.

This article at a glance

Gross income is the starting point of finding out your net income. You can use this figure to deduct your taxable income. If you are worried about working out complicated calculations, the formula to calculate the gross income is straightforward. This article will cover the definition of gross income, the formula and how to work out gross income. So, let’s dive in.

What is gross income?

Gross income refers to a person’s total earnings before taxes and other deductions. Other sources of income may include dividends, rental income and interest income.

In business, gross income is also known as gross profits or gross margin. It’s usually a line item on an income statement. Gross income is revenue from the sale of goods minus the cost of goods sold. Revenue can also consist of rental income, royalties, capital gains from investments, etc.

Why understanding gross income is important for your business?

Gross income is a good indicator of your company’s financial health. You can even use it to optimise your business in the short and long term.

Here are the other reasons why gross profit matters to your business:

1. It determines the profitability and financial performance of your products and company.
2. It reflects how efficient your business or product is in the market.
3. It allows you to review your products and accounting policies.
4. It determines whether you need to purchase any equipment or materials at a low cost.

How to calculate gross income

Companies are constantly concerned about gross income because it measures the profitability of the product sold. A healthy gross income gives an edge over their businesses if they want to trade with their international partners.

For individuals applying for jobs, your employer may ask for your gross income to gauge the expected salary.

The formula for gross income for businesses and individuals is the same. However, they are calculated differently regarding the classification of items for businesses and individuals. Here’s why.

Individual gross income

To determine an individual gross income, add the monthly salary and other sources of income before taxes and other deductions. The calculation is as follows:





Business gross income

Unlike gross income for individuals, the formula for business income takes the cost of goods sold (COGS) into account. The cost of goods sold refers to the direct expenses that contribute to the production of the goods. It could be packaging, labour cost and material cost. So, the calculation is as follows:





Examples of gross income

Wonder how the calculation applies in real life? You may want to consider the following examples:

Gross income for business

For example:

Polar Company received total revenue of £1,000,000 in 2021. The expenses related to the product sold were as follows:

Cost of material — £100,000

Supply cost — £50,000

Labour cost — £100,000

Power consumption — £40,000

Gross income = £1,000,000 — (£100,000 + £50,000 + £100,000 + £40,000)

£1,000,000 — £290,000 = £710,000

Gross income for an individual

For example:

Matthew receives an annual salary of £30,000 as an executive in a design firm. Aside from his yearly salary, he also gets the following income:

Interest from the bank: £300

Bonus: £1,000

Capital gains from investment: £500

Gross income = Salary + other sources of income

£30,000 + £300 + £1,000 + £500 = £31,800

Gross income vs net income

Although gross income and net income describe profits, they function differently. Gross income only includes COGS in the calculation. But for net profit, you need to take into the overhead expenses for the year.

For example, All Lights Company will have a revenue of £2,000,000 in 2022. Their direct expenses for the cost of goods sold amounted to £400,000. To determine whether they have earned a profit or lost money, they also need to include the other business expenses, such as workers' salary, office rental, and taxes and insurance which cost £800,000 in the calculation.





The net profit will be £800,000.

Gross income provides a quick overview of the profitability of your products, while net income. If you want to focus on the performance of your product and not the other expenses, capturing the gross income will make sense. However, if you want to know the financial health of your entire business, net profit will give you a better idea as it incorporates every aspect of your business expenses.

Alternative ways to make payment through Silverbird

A healthy business profit represents a strong operating gross margin, which will help you build credibility when you trade internationally with your partners. As you trade, you will also want an efficient global payment solution.

At Silverbird, we make international business payments fast and easy. We serve international businesses that enable them to pay and get paid from over 180 countries. You can transfer payments from your account to your supplier’s account in over 30 currencies. Sign up for our business account today!