What counts as income, and why promised money isn't yours

Income is only money that is already with you and can be banked right now. And even of the money sitting in your account, part may not be yours at all: it is a debt to someone else that looks exactly like money.

Money on its way is still not money

The source puts it in a few short lines. You cannot bank money that is on its way but not here yet, you cannot plan against money that has only been lined up, and as it says, “you cannot be paid from sums that 'will be here soon.'”

Those are three forms of one mistake, and anyone who works for themselves knows all three. A quote that was approved over the phone. A project everyone treats as closed. A client who said the transfer goes out this week.

Suppose a designer gets a text approving a $30,000 project and orders equipment on the strength of it. Then the project slides to the next quarter. The equipment arrives on time.

Or suppose a contractor counts on a payment promised for the first of the month. It comes on the nineteenth, and he pays interest on the three weeks in between.

Neither client did anything unusual. The whole mistake was counting money that had not arrived as if it were already here.

Why the source calls that number false

The source does not stop at a practical warning. It gives the thing a name. An income figure made of anything other than cash you can bank immediately, and that is in hand right now, is a false number.

The figure in question is gross income, meaning all the money that comes in before anything is taken off it. Look at how many conditions the source piles onto that one word: cold, hard, bankable, immediately, in the shop right now. That is five conditions for a single word, and its formal definition narrows it further, to money received by a fixed day and hour each week.

Suppose a business owner tells herself she did $50,000 this month. In fact $31,000 came in, and the rest is on sixty-day terms, so it will arrive two months from now. Her income this month is $31,000. The rest is a promise.

Now take the same owner after she starts writing down two separate numbers every month: what was agreed, and what actually arrived. The gap between them turns out to be steady, and a steady gap is something you can plan around.

There is nothing wrong with working on credit terms, which simply means giving the client time to pay. What is wrong is counting that work as though the money were already here.

Even money in your account may not be yours

This is the distinction that costs the most to miss. According to the source, if you invoice money as your own when it is really owed to someone else, “you wind up with a false profit and get taxed for it.” A false profit is a profit that shows up on paper with no money of yours behind it.

For a small business this is immediate. The sales tax you added to the invoice belongs to the tax authority; you only collected it for them. The estimated tax you owe on this quarter's profit does not belong to you either. Neither does a payment you took in advance for work you still have to deliver.

Each of them is in your account and each of them looks like money, yet each is a liability. A liability is money you owe, even while it is sitting with you.

Suppose a carpenter turns over $40,000 in a quarter and sees $40,000 in the account. When the return falls due, about $3,000 of it turns out never to have been his.

Or suppose a coach sells packages of ten sessions, paid up front. Six months later she has 70 sessions that are paid for and not yet given. That is two months of work with no new money behind it.

False profit is not a figure of speech. The tax on it is real, and it is paid in real cash.

Earned money and received money are not the same

The whole chapter rests on one distinction. There is money you have earned and money you have received, and they are not the same money. Confusing the two is expensive.

It costs you from both directions. If you count money that has not arrived, you spend against a sum that does not exist, like the designer with the equipment. If you count money that arrived but belongs to someone else, you feel richer than you are until the return falls due, like the carpenter.

Either way, the number the owner is looking at is bigger than the money that is really hers or his, and every decision built on it is built on air.

The booklet gives this chapter two short exercises, called separate and calculate. In the practice section at the end you will also find one called the second pot.

How much you made this month is not answered by what was agreed, and not by what you see in the account. It is answered by the money that came in, after you take off what belongs to others.

The booklet is general knowledge, not financial advice for your business.