Revenue and expenses are the basic calculations on which most business decisions are made. All businesses make basic calculations for each division in which they balance the revenue projections against the projections of expenses. This is such a fundamental part of the business process that it is often not even discussed. However, this does not change the importance of the calculation. Understanding the relationship between income and expenses will help you understand a lot about how businesses work.
The income of a business can be defined as the amount of money that enters at any time through sales or other companies. The income of a company will fluctuate greatly over any period of time depending on the demand of your product. For this reason, it is wise to select a specific time increment in which to measure revenue. Companies often prepare annual revenue reports that measure their total income per year.
The expenses of a company can be defined as any cost that can be incurred, such as infrastructure or payroll. The expenses of a company also often fluctuate during any period of time, but are more under the direct control of a company. It is possible to reduce expenses by making cuts in one or more areas. Most businesses try to correlate their expenses with their income so that expenses stay within a range and do not exceed income.
Any business faces a choice of how much risk to take when it comes to your income against your expenses. By spending more as a business you can earn more income if you are successful. However, if you do not succeed, your expenses will potentially exceed your income and leave you with debt. A standard rule in business is that the more risk you take the more you can expect to win.
It is not at all unusual for a business’s expenses to exceed its income. Most new businesses spend their first years with debt. It takes time to build the income, while the expenses are immediate. There are many ways for a business to face this situation. Many ask for loans of various types from financial institutions. Others receive financing from investors to stay afloat, as venture capitalists or family members.