How to Use Income Categories in Your Business for Better Decision Making

If you’ve been in business for a few months, I can almost guarantee that you’ve heard of expense categories. These are the categories in your accounting system that you group your business expenses into to be able to file your taxes. They might include things like office expenses, advertising, or bank fees. You (or your accountant or bookkeeper) are most likely already using expense categories.

But I’m also just as certain that you probably haven’t heard of income categories. Because they aren’t always required for taxes, business owners and accountants often don’t use them. 

However, income categories are a huge asset to your business. So let’s chat about what they are, how to use them, and why they are life changing.

What are income categories?

Income categories are buckets of different types of income in your business. They are used to categorize income in your business for taxes and other purposes.

These categories will appear on your Profit and Loss statement under the ‘income’ heading. Similar to expense categories, they help us spell out exactly where your income is coming from. However, contrary to most expense categories, they are unique to your business.

Some income you’re required to split apart for the IRS, like service income from product income and rental income. These income sources will likely go into different boxes on your tax return so it’s important to separate them throughout the year. 

However, if you break your income down even further into custom categories, you’ll be amazed at the positive impact on your business. 

How to Use Income Categories

The IRS tells us to categorize business income into service income, product income, rental income, and any passive income. So always start with those major categories when determining your unique income categories.

Next, we are going to use your unique service offerings, income streams, and different types of income that your business has to form your custom income categories. 

If you have a service based business:

1. List out your offers or services and group them into buckets that are similar in the way you provide the service.
   For example: Projects versus recurring or 1:1 consulting versus workshops and trainings. 

2. Now you can break down these categories even further into types of services if they require different resources to provide.
   For example: Website design versus social media management or systems consulting versus marketing consulting.

If you have a product based business:

• List out your products and group them into buckets that are similar to your buyer. For example: Hair products versus beauty products or party supplies versus home decorations.

Or

• List out the way you make sales to track different avenues of revenue.
  For example: Website sales versus Etsy sales versus in-store sales. 

You should aim for three to ten custom income categories that spell out the different ways you bring in money and serve your clients. 

Don’t worry about getting these perfect the first time, you can tweak categories as your business grows and evolves.

Why Custom Income Categories Are Important

Now onto the life-changing part:

Income categories will change how you view your business!

Every business’s goal in its simplest form is to make more money, right?

Well, the key to making more money is knowing where your money comes from. If you know how and why you make the most money, it’s easier to intentionally get your business making more money.

When used correctly, income categories can show you a couple of really important things: 

• What offers or products bring in the most money

• What offers or products bring in the most money with the least cost

• What offers or products bring in the most profit for your business. 

Each month in my own business, I identify the income categories that brought in the most money, cost me the least to provide, cost me the most to provide, and are the most scalable within my business. 

This helps me make strategic decisions for where to focus my attention in future months and make long term goals. 

You can use the metrics provided by custom income categories to decide where to invest more time and resources, what offers or products to expand, and even new services and products to offer. 

If you keep tracking the same income categories over months and even years, you’ll be amazed how much better you know your business!

Once we know where the money in our business flows from, we are empowered to make the best decisions for our business (and put more money in our pockets).

Need help with categorizing income in your business?

Stuck on where to start with your income categories? Head over to Instagram, send me a DM and I’ll give you some examples based on your specific industry.

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