Tashkent financial institute department of finance from "finance"

Incomes of corporate enterprises and their types

Incomes are the lifeblood of any business. Without them, a business would be unable to attract investors and would likely close in short order. But exactly how incomes are calculated can be a somewhat complicated matter in the world of business. In this plan we need to know about income and how it impact on business.

Revenue is the total amount of income generated by the sale of goods or services related to the company's primary operations. Revenue, also known as gross sales, is often referred to as the "top line" because it sits at the top of the income statement. Income, or net income, is a company's total earnings or profit. When investors and analysts speak of a company's income, they're actually referring to net income or the profit for the company¹⁴. 

The revenue number is the income a company generates before any expenses are taken out. Therefore, when a company has "top-line growth," the company is experiencing an increase in gross sales or revenue.

Both revenue and net income are useful in determining the financial strength of a company, but they are not interchangeable. Revenue only indicates how effective a company is at generating sales and revenue and does not take into consideration operating efficiencies which could have a dramatic impact on the bottom line.

Net income is calculated by taking revenues and subtracting the costs of doing business, such as depreciation, interest, taxes, and other expenses. The bottom line, or net income, describes how efficient a company is with its spending and managing its operating costs¹⁵.

Income is often considered a synonym for revenue since both terms refer to positive cash flow. However, in a financial context, the term income almost always refers to the bottom line or net income since it represents the total amount of earnings remaining after accounting for all expenses and additional income. Net income appears on a company's income statement and is an important measure of the profitability of a company.

Apple Inc. (AAPL) posted a top-line revenue number of $260 billion for 2019. The company's revenue number represented a 2% year-over-year decrease. Apple posted $55.3 billion in net income for the same period, which represented a 7% decrease year-over-year.¹⁶

We can see that Apple's net income is smaller than its total revenue since net income is the result of total revenue minus all of Apple's expenses for the period. The example above shows how different income is from revenue when referring to a company's financials.

Net income (NI), also called net earnings, is calculated as sales minus cost of goods sold, selling, general and administrative expenses, operating expenses, depreciation, interest, taxes, and other expenses. It is a useful number for investors to assess how much revenue exceeds the expenses of an organization. This number appears on a company's income statement and is also an indicator of a company's profitability.

The revenue of an individual are money that person receives for work or business ownership. The revenue of a business are the same as its net income or profit. These terms all mean essentially the same thing.¹⁷

Net revenue of a business is income minus expenses, taxes, and deductions. More precisely, net income = revenues (sales) – cost of sales, operating expenses, and taxes, over a given period of time¹⁸.

Here's an example: The gross sales of a company are $500,000 for a year. Reduce this number by the cost of goods sold at $300,000, operating expenses (including depreciation) of $80,000, and taxes of $20,000. The result is the company's net revenue (profit or net income) of $100,000.

These two types of revenue are basically saying the same thing, but company might see one or both of them in a corporation's annual report or other documents. Accumulated income is the net profits of a corporation that are not given to shareholders as dividends. They are reinvested into the company¹⁹.

Retained revenue is the total of all net income earned by the company over its life, less any distributions to shareholders. The revenue income amount is shown on the business balance sheet as equity (ownership) because it represents amounts of income that aren't needed to pay bills and are available to shareholders²⁰.

Revenue is an important measure for public companies (those that offer shares of stock to the public) because investors base investment decisions on income, and stock price is based on income. While revenue reports must be taken in context, income per share is the best way to measure the value of a company's stock²¹.

Without an income stream, business will fail. Many small businesses have a single income stream, such as an electrician or plumber. Having multiple streams of income is a good way of safeguarding business against a downturn in one particular stream. It can give business stability and the opportunity to grow.

Monitoring income and expenses is essential. There are two types of income stream, active and passive. Business is most likely using an active income stream. This is where corporate enterprise do some work or provide a service, and someone pays for it.

Passive income is where the income is not directly tied to the work corporate enterprise do. Although it says passive income, there is still work required to generate the revenue. It doesn’t come for free. In general, the work needed for a passive income stream takes place early on, and the income comes later.

An excellent example of this is an online store. The work at the beginning is to build the website, upload products, and then promote them. The passive income comes later as people begin to buy products from store. It’s passive, as people can even buy products.

Big business has been diversifying its income streams for centuries. They expand their business operations into different sectors to generate new streams of income. Almost any company can diversify. A flower shop can develop a separate wedding flower business, for example, or offer mail order. The most potent diversification is into a completely new business sector. But that takes a lot of effort and expense.

Business income is a type of earned income and is classified as ordinary income for tax purposes. It encompasses any income realized as a result of an entity’s operations. In its simplest form, it is a business entity's net profit or loss, which is calculated as its revenue from all sources minus the costs of doing business²².

Business income is a term commonly used in tax reporting. According to the Internal Revenue Service (IRS), “Business income may include income received from the sale of products or services. For example, fees received by a person from the regular practice of a profession are business income. Rents received by a person in the real estate business are business income. A business must include in income payments received in the form of property or services at the fair market value of the property or services”²³.

Aside from diversification, there are other ways to generate income known as the seven streams of income (Figure 1).

Many of these are not available to everyone. Corporate enterprise need to have money already to benefit from some of these income streams.

Earned income is primary income stream through a job. Earned income is very limiting and has attracted the acronym! In other words, corporate enterprise earn just enough to survive²⁴. Of course, some jobs pay exceptionally well, but these are exceptions, not the norm. To go beyond a job and start own business requires taking risks and moving into profit income.