How Much Are You Really Making?
Let’s talk about your net income.
As an entrepreneur, it can be easy to focus on our top line. That means looking at our gross – or total – income. Typically, you look at this number as a monthly or annual total. So when people talk about “hitting six figures” they mean their total annual income is $100,000 or more.
When you look at your gross income month by month, you can start to get a sense of what you’re booking and when you analyze it over time, you start to see trends. For example, perhaps your work is seasonal and the summer months are busier than the winter months. You’ll be able to track your ups and downs over time.
Your gross income is an important number. Figuring out how to drive your top line is a key goal in any business.
But there’s another number that really dictates what you can do with your business, and how well you can support yourself and your lifestyle.
Gross Income vs. Net Income
Your net income is what’s left over when you subtract out your expenses from your gross income. On your Profit & Loss Statement, it’s the last line on the report and it’s also called your profit.
As an entrepreneur, your profit determines how much you have to play with to reinvest in your business and how much you can take out of your business for your own use. Perhaps you have a conference you’d like to attend. You can put some of your net income towards growing your business. Need to make your mortgage payment or put aside some cash for a new car? Whether your business is turning a profit will impact your ability to meet your commitments and financial goals.
How often do you look at your net income?
For a lot of us, net income may not be your go-to financial number, but this is where magic happens. If you have increasing net income, you have more money to play with, both for yourself and your business.
There are a couple reasons to keep an eye on this number.
First of all, this is the general bucket you have to make strategic purchases for your business, to set aside dollars for taxes, and to pull your “paycheck” from. Keeping an eye on it regularly can really help you make smart, timely decisions.
If your monthly net income is stable, you can know month in and month out exactly how much you can take out of your business. If you see significant fluctuations month to month in your net income, you’re more likely to feel it in your pocket book, since your ability to pay yourself is going to fluctuate as well.
Try this exercise: calculate your net income for the next 4 – 8 weeks. You can do this in a spreadsheet or in your accounting system. Even a notebook will work. Note your gross income and subtract out your expenses for each week. The resulting net income (profit) can be broken out into money you want to reinvest in your business, tax set-asides, and what you’ll take out of the business for your personal use.
You may find that there’s less to play with than you thought or you may be able to see more clearly where you want to be spending your hard-earned coin. Getting comfortable with your net income is one of the first steps you can take in finding your financial flow. As you can see, it’s not a difficult exercise; it just takes a little time to track your numbers and you’re on the road to smart financial management. Easy peasy!