This post is the first in a series of articles where I will focus on Business Basics for Architects. Without the business background required for success, there are many relatively simple terms and strategies that we, as business owners, need to know but were never taught. These are the critical elements of business success that I wish I knew before launching Fivecat Studio.. but I didn’t know what I didn’t know.
The difference between gross income and net income, and why these terms are important for us to understand, is the subject of this first Business Basics for Architects article.
Gross vs. Net
Let’s start with gross income. In simple terms, gross income is all the money your firm makes. It should include all your fees, sales and payments made to the firm. Any transaction where money is flowing into the business is included in this calculation.
Net income (also known as Net Profit or The Bottom Line) is your gross income minus all your expenses, overhead and taxes. It’s what is left after you have paid your consultants, your vendors and the government. After all your outflows are complete, what is left is your net income.
A fun way to remember the term net income is to imagine that you pour all your income and all your expenses into a big net. The net catches all the expenses and all the income that is applied to those expenses. The money that flows through the net is your net income.
Why are they important?
Knowing the difference between gross and net income is important to the success of your business. Your net income is a metric that will show the relative health of your firm. If you’ve done your marketing well and focused on sales, you will have a bunch of new work leading to more revenue feeding your firm. Your gross income will start looking very impressive.
With all that growth though, comes increased expenses. You’ll start receiving more invoices from your consultants. You may need more staff, which will lead to higher payroll. Your workspace will start feeling a bit too cozy and you may need to move to a larger space. Your net income, what’s left after you pay all those expenses, will show you how well you are actually doing. Too many expenses and your net income will be begging for mercy.
Track your net income every month and you will see the trends of your business. During the summer months at Fivecat Studio we see our net income drop, but since we track net income as a metric, we can prepare for the annual low spots and have savings in place to cover our monthly expenses.
In a few weeks, I’ll share another Business Basics for Architects post. Leave me a comment below and let me know some of the basics on which you would like to brush up. What confuses you? What are some of the basics you wish you knew before launching your firm?
Photo Credit: Shutterstock / Dirk Ercken