Annual receipts are a crucial metric for businesses, especially when engaging in Federal contracting or applying for various Small Business Administration (SBA) programs. But what exactly are annual receipts, and how are they calculated?
What Are Annual Receipts?
Annual receipts refer to the “total income” (or “gross income”) of a business, plus the “cost of goods sold.” These figures are typically reported on the business’s IRS tax return forms.
Why Are Annual Receipts Important?
For Federal contracting purposes, annual receipts are used to determine a business’s size standard, which can affect eligibility for small business set-asides and other advantages. The SBA also uses annual receipts to assess eligibility for its Business Loan and Disaster Loan Programs, Surety Bond Program, and Small Business Investment Company (SBIC) Program.
How Are Annual Receipts Calculated?
- Standard Calculation: For most purposes, annual receipts are averaged over a business’s latest five complete fiscal years. This helps to smooth out any anomalies and provide a consistent measure of business size.
Example Standard Calculation
Step 1: Gather Annual Receipts for Each Year
Assume a business has the following total income (or gross income) plus the cost of goods sold for the past five complete fiscal years:
- Year 1: $500,000
- Year 2: $550,000
- Year 3: $600,000
- Year 4: $650,000
- Year 5: $700,000
Step 2: Sum the Annual Receipts
Add up the total receipts for all five years:
Total Receipts=$500,000+$550,000+$600,000+$650,000+$700,000
Total Receipts=$3,000,000
Step 3: Calculate the Average Annual Receipts
Divide the total receipts by the number of years (5 years in this case):
Average Annual Receipts=Total Receipts/Number of Years
Average Annual Receipts=$3,000,000/5
Average Annual Receipts=$600,000
- Alternative Calculation: For SBA loan and investment programs, businesses can choose to average their annual receipts over either three or five years. This flexibility can be beneficial in showing a more favorable financial position. If the business has experienced significant growth in the past three years, using a shorter averaging period can reflect a higher average annual receipt, which might be beneficial when applying for loans or investments.
- New Businesses: If a business has not been operational for five years, it can estimate its annual receipts by multiplying its average weekly revenue by 52. This method provides a way to approximate annual receipts even without a long operational history.
Example Calculation for a New Business
Assume a business has been operational for 3 years and has the following total income plus the cost of goods sold for each year:
- Year 1: $400,000
- Year 2: $500,000
- Year 3: $600,000
Step 1: Calculate Total Receipts for All Years
Total Receipts=$400,000+$500,000+$600,000
Total Receipts=$1,500,000
Step 2: Calculate the Total Number of Weeks in Operation
Since the business has been operating for 3 years, and there are 52 weeks in a year:
Total Weeks=3×52
Total Weeks=156
Step 3: Calculate Average Weekly Revenue
Average Weekly Revenue=Total Receipts/Total Weeks
Average Weekly Revenue=$1,500,000/156
Average Weekly Revenue≈$9,615.38
Step 4: Calculate Average Annual Receipts
Multiply the average weekly revenue by 52 to get the average annual receipts:
Average Annual Receipts=$9,615.38×52
Average Annual Receipts≈$500,000
Regulatory Reference
The calculation of annual receipts follows guidelines set forth in 13 CFR 121.104. This regulation ensures consistency and fairness in how receipts are determined across different businesses and industries.
Understanding and accurately calculating annual receipts is essential for businesses looking to engage in Federal contracting or benefit from SBA programs. By following the outlined methods, businesses can ensure they meet the necessary requirements and take full advantage of the opportunities available to them.
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