Table of Contents
This article will discuss the finance terms “Direct and indirect income” and present examples of direct and indirect income lists.
The main aim of starting a business is to make profits. Profits are classified under the broader category of revenues or incomes. Income refers to all the money a company receives from directly offering its products and services or through other means unrelated to the day-to-day operations. This explains why the word income is often used interchangeably with profits.
It would help if you determined the total revenues and expenses to calculate your business’s total income/net income. Then, you subtract total expenses from total revenues. A positive figure means the company has made profits, while a negative figure denotes losses.
Business incomes are divided into two broader categories: direct and indirect.
How do you differentiate direct income from indirect income?
Direct income refers to a business’s income through activities directly related to its day-to-day operations (for example, Income from selling products or services). On the other hand, indirect income is the revenue that a business generates through channels that are not directly related to its day-to-day operations (for example, old newspaper sales, old bottle sales, etc..)
If you run a coffee shop, you probably have a manager, employees, and suppliers. The profits you get directly from selling coffee, snacks, and other beverages in such a store constitute direct income. Therefore, immediate income can be termed an active income a business generates. This explains why any shrewd businessperson will quickly tell drastic changes in their direct income patterns. For instance, if your coffee shop causes around $800 per month of immediate income, which drops to $400 in a given month, you will automatically know something is amiss.
Therefore, direct expenses are easy to track because the entire business depends on them. For example, if your coffee shop registered a loss in a given month, you would adopt drastic measures to bring it back to profit-making. Conversely, your business could easily collapse if direct income is not well-tracked. And remember, whether your business performs well or dismally, you would still need to pay rent, pay your employees and suppliers, and renew all municipality licenses. In essence, direct incomes are significant for a business’s existence, so much so that a little lapse could cause the company to head south.
What is indirect income?
Now, in the same coffee shop, you probably have newspapers, old cutlery you no longer use, bottles and cans, etc. You may decide to keep them or dispose of them. Usually, many businesses would not worry about disposing of old newspapers until they have made heaps in their offices and are consuming space unduly. Then, of course, a business person will not just discard them. Instead, he will assess their value and then sell them. The kind of revenue generated this way constitutes indirect income.
Indirect income is not something your business needs to operate. You can consider it an extra cash stream or, better yet, passive income. However, indirect income can salvage a company in dire straits. For instance, it would be unreasonable to sit back and watch your business make losses when you have a whole carton of cutlery you don’t use or an old delivery cart just lying around.
How To Calculate Direct and Indirect Income
You must know all the elements that constitute expenses to determine your direct income. Expenses can be extensive, and if not tracked, you might lose so much money through loopholes that you could easily have avoided. For example, suppose you are a coffee shop owner.
In that case, the most significant expenses you probably incur include purchasing and maintaining equipment such as coffee makers, coffee grinders, Espresso machines, refrigerators, ovens, toasters, and other relevant utensils. And even if you already have these in place, there are beverage supplies you will need to pay for from time to time, pay your employees, and renew all municipality licenses.
Expenses can be very diverse, but the channels may be fewer regarding revenue. So, after determining your total costs, you expect to realize profits from the sales made on coffee drinks and snacks. The difference between sales and expenses incurred over time constitutes your direct income. If the difference is positive, you have made profits; if the difference is negative, you have made losses. When it comes to indirect revenue, the formula is more or less the same. However, the difference is that there are probably fewer expenditures. That expenditure might have already been factored in when calculating your direct income.
For instance, if you buy a newspaper today and sell it two years later as part of a bundle, the initial expenses incurred in purchasing the newspaper must have already been considered earlier when determining your direct income. So, typically, indirect incomes do not involve lots of lengthy computations. Usually, the transportation cost only depends on where you plan to locate the buyer. The next chapter will see examples of direct and indirect income and expenses.
Direct and indirect income list
Examples of direct income are Income from selling products and income from business services. Examples of indirect income are the sale of old newspapers (non-business), carton boxes (non-business), old bottles (non-business), and any Fixed Asset (non-business).
Direct income list
- Income from selling products (business)
- Income from business services
- Royalties from patents, copyrights, or intellectual property
- Licensing fees received
- Income from direct commission sales
- Revenue from subcontracting or outsourcing services
- Sale of scrap or waste materials from production
- Income from premium services or express deliveries
- Income from customized product orders
- Fees from after-sales services or warranties
- Revenue from on-site installations or setups
- Income from consultancy directly related to products or services
- Revenue from dropshipping arrangements
- Income from direct digital product sales (e-books, software, etc.)
- Commissions from affiliate marketing directly related to the business
- Revenue from franchising the business model
- Income from workshops or training sessions related to business offerings
- Ad revenue from self-hosted platforms showcasing products or services
- Sponsorship income for events or webinars hosted by the business
- Revenue from exclusive member or subscription services
- Sale of prototypes or limited edition products
- Revenue from pre-orders or crowdfunded products
- Income from leasing or renting out business assets or equipment
- Direct sales from pop-up shops or exhibitions
- Revenue from bulk or wholesale orders
- Income from exclusive partnerships or collaborations
- Revenue from licensing out production methods or recipes
- Income from affiliate partnerships (e.g., referrals)
- Sale of complimentary accessories or add-ons related to primary products
- Revenue from expedited or specialized service offerings
Indirect income list
- Sale of old newspapers (non-business)
- Sale of carton boxes (non-business)
- Sale of old bottles (non-business)
- Sale of any Fixed Asset (non-business)
- Rental income from unused business space
- Interest earned from business savings accounts
- Dividends from investments unrelated to business
- Sale of unused business equipment or furniture
- Licensing or franchising of business brand, not directly tied to core services/products.
- Royalties from books or publications about the business
- Income from advertisement spaces on business premises or website (if not a core business activity)
- Sale of surplus or outdated inventory (unrelated to regular sales)
- Cashback or rewards from business credit cards
- Income from affiliate marketing (unrelated to main business offerings)
- Income from sponsored content on business platforms (not a core activity)
- Vending machine profits from business premises
- Commissions earned from third-party endorsements or referrals
- Profit from selling intellectual property rights unrelated to the central business
- Income from participating in surveys or market research
- Sale of collectibles or memorabilia related to the business
- Revenue from hosting non-core workshops or seminars at business premises
- Grants or incentives received for green initiatives or community involvement
- Profits from business contests or raffles
- Sale of business-related merchandise (if not a core product)
- Income from parking spaces if you own a large premise
- Income from tax rebates or refunds
- Revenue from occasional pop-up events or sideline ventures
- Sale of art or decor previously used in the business space
- Profits from non-core collaborations or partnerships
- Any tax credits or government incentives not directly tied to the business’s primary products or services
Direct and indirect expenses list
Here below are lists (just examples) of direct and indirect expenses.
Direct expenses are direct labor and direct materials, including raw materials, commissions, and manufacturing supplies.
Direct expenses list example
- Carriage inward
- Fuel for production
- Heating expenses
- Lighting expenses
- Carriage on purchase
- Grease and lubricants
- Carriage (general)
- Gas expenses
- Water charges
- Oil and lubrication expenses
- Custom duty on imports
- Manufacturing supplies
- Dock charge (inward) expenses
- Factory duty or taxes
- Motive power (e.g., for machinery)
- Coal for production
- Factory rent
- Factory maintenance
- Freight inward charges
- Wages for factory workers
- Wages for supervisory staff
- Raw material costs
- Packaging material costs
- Machinery lease/rental for production
- Insurance on goods in transit
- Factory equipment depreciation
- Cost of molds and tools
- Quality control and testing expenses
- Direct labor overtime
- Production bonus or incentive payments
- License or permits for production
- Import clearance fees
- Pallets and containers for transportation
- Protective gear for workers (e.g., gloves, masks)
- Royalty payments on production, if applicable
- Technical consultation fees related to production
- Direct training expenses for factory staff
- Short-term storage for raw materials awaiting production
- Waste disposal and recycling expenses
- Repairs and maintenance of production machinery
What are indirect expenses?
Indirect expenses in business are salaries, insurance, equipment maintenance, equipment depreciation, facility rent, office supplies, utilities, advertising, and marketing.
Indirect expenses list
- Facility rent
- Facility Insurance
- Salaried compensation
- Secretarial wages
- Depreciation and amortization
- Research and development
- Advertisement costs
- Audit fees
- Distributive expenses
- Entertainment expenses for business purposes
- Establishment expenses
- General administrative expenses
- Hospital charges (employee medical benefits or accidents)
- Insurance (other than facility, like liability or employee benefits)
- Interest on borrowed capital
- Legal costs & low fees
- License fees (business operation, software licenses, etc.)
- Office expenses (supplies, stationery, etc.)
- Office lighting and utilities
- Packing expenses (not directly related to production)
- Postage, courier, and telegram charges
- Provision for doubtful debts
- Rent for equipment or secondary facilities
- Repairs & renewals not directly related to production
- Salaries (other than production-related)
- Stable expenses (if applicable, e.g., for businesses with horses)
- Telephone and internet charges
- Traveling expenses for staff and executives
- Utilities (water, garbage disposal, etc.)
- Training and development for staff
- Membership and subscription fees (magazines, industry associations)
- Employee welfare and recreation
- Bank charges and service fees
- Taxes and licensing (other than on production)
- Bad debt expenses
- Recruitment and hiring expenses
- Employee perks and benefits (health insurance, retirement plans, etc.)
- Security services for the facility
- Software and IT support
- Refreshments for office
- Business consultation fees
- Gifts and promotional items
- Outsourced services (accounting, HR, etc.)
- Marketing and public relations
- Trade show and exhibition expenses
- Miscellaneous expenses
Let us now see indirect income examples in the Tally and other accounting software:
Tally ERP 9 is one of India’s most popular accounting software. Direct income in Tally can be easily defined by creating a ledger and then choosing from the list of groups. See the video:
What is the difference between tallying and accounting?
Computer Accounting is the general concept of software that helps businesses manage significant financial transactions, data, reports, and statements efficiently. Tally is the only accounting software for computer accounting.
Another excellent USA accounting software is Quickbooks. Quickbooks income statements can be created using the Report Tab in the toolbar at the top of the user screen and scrolling down to the “Company & Financial” option. Direct and indirect income can be seen in the video below:
Direct and indirect income can be defined in Xero account software as well. See How to Create an Income Statement in Xero below in the video:
Why Should I Care About Both Incomes?
We have already determined that every business owner should keep track of their direct incomes. This comes naturally. However, not very many entrepreneurs are so successful when it comes to tracking their indirect incomes. This does not mean you shouldn’t. Indirect incomes are just as significant to the operations of your business as direct incomes are. First, it is a way of gaining total value for your money. Though you will often sell the asset at a relatively lower price than the initial purchase price, it is way better than tucking it into the trash. Also, putting up old assets for sale proves to your employees that you are in charge of your company’s inventory. No business is immune to pilferage, and as you know, employees will often target the least-utilized stuff. But when they occasionally see you selling them [or just moving them], they resist all temptations to steal.
Also, as we mentioned earlier, indirect incomes can salvage your business. The revenue earned will be helpful when you are deep in debt or have outstanding payments.
Lastly, it is essential to remember that indirect income needs to include proceeds from selling old assets. Other areas include offering consultancy services in your line of work, charging for them, starting and monetizing a blog about your company or industry, etc.
Conclusion
Our detailed analysis of direct and indirect income goes there. We hope you will find it helpful, especially if you are a startup struggling with keeping tabs on your revenues, expenses, and assets.
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