Residual Income

Residual income can be defined as the income that is left with a business or an individual after paying all the expenses, debt and mortgages from the net income. Most of the businesses calculate their residual income on monthly biases after paying all the bills and debts regarding that month. Another form of residual income is the income that an individual or a business is allocating for a mortgage but the mortgage has been paid to its entirety.

Residual income of a business or an individual is considered to be an important parameter when there is a question of securing loan on the biases of income. The credit companies and third party credit lenders analyze the trends of the past residual income of a company or an individual before sanctioning the loan to that individual or business. If the individual or the business has sufficient residual income the loan can be sanctioned readily by the lenders as they know that the borrower has sufficient amount of residual income to pay loan payments every month.

The examples of the residual income in terms of individual can be the commission of an insurance agent that he gets when the customer renews the insurance policy each year. Another example of residual income is the income of a sales representative when a customer bought a product from that representative each month and renews the order every month.

For a business perspective residual income is the income that is left with the business after the accounting of true cost of capital of the business. In order to calculate the residual income of a business we need to calculate the equity charge of that business.

Equity Charge = Equity Capital x Cost of Equity

Residual Income = Net Income – Equity Charge