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Profit & Loss: Simply because you charge $100 for a service does not mean that you profited $100. What you gross (charge and earn) is NOT the same as what you’ve profited. We will break down the difference as well as national pricing strategies in this module.
Key Terms:
- Revenue: Net & Gross
- Profit: Net & Gross
- Deductions
- Sales Price
- Retail Vs. Wholesale
- Mark-Up
- Depreciation
- Tax Liability
- Tax ID Numbers
Gross Revenue/Gross Profit: Refers to the amount of money charged for an item or service not including retail sales tax. Calculate your total Gross Profit/Revenue for the year by adding up all your sales and subtracting any retail sales or shipping charges you’ve charged your customers. Do not subtract your expenses. The total would be your annual gross revenue or business income.
Net Revenue/Net Profit: Refers to the actual profit/income your business earned after all legal business deductions. This is the actual amount your business or you “took home”.
Deductions: Business related expenses that include but are not limited to; equipment costs, labor, rent, utilities, office supplies, materials and supplies. Your specific legal deductions are best found by a tax professional or CPA. Starting your business off with one can help you in understanding the paperwork and receipts you’ll need to keep in order to deduct these expenses from your gross revenue.
Sales Price: Refers to the customers purchase price, not an item on sale. It’s the actual retail or purchased price of your products or service.
Retail: The listed or paid price for an item by a consumer.
Wholesale: Business owners can often purchase goods and supplies that they use or resell to customers at significantly less than the retail price. In order to get these prices or have access to wholesale options businesses often have to supply a business license, certification or other documentation to prove it’s for business use.
Mark Up: The difference between the wholesale cost and the retail sales price. This is where profit comes into play. If you purchase something at wholesale for $20 and resell it for $40 the difference is $20, your gross profit would be $20 and the mark up is a 2 x (two times the wholesale price). To calculate your mark up divide the retail price ($40) by the wholesale cost ($20).
Depreciation: Equipment and supplies bought today for $100 are not worth $100 later. They usually go down in value. The loss of value can often be deducted from a businesses tax liability (see professional for help with this).
Tax Liability: A business is required to pay taxes to their own state, sometime county as well as the federal government. If they are selling products to consumers they are responsible for paying sales tax as well.
Tax ID Number: Basically like a social security number for businesses. Before registering a business with your state you’ll most likely need this number to create a local state account. Self employed/1099 individuals usually can not get one of these numbers as they file their taxes using their own social security number.