What Is External Income?

In the financial world, external income can have two different meanings. One is money earned through outside activities, such as selling products and services. The term also can refer to a remittance, a sum of money sent remotely as part of a transaction that may be a sale or a transfer of funds home. Usually the context provides information about the intended meaning; a company referring to external income in an annual report, for example, is probably not discussing remittances.

The first sense of this term covers external activities at a company, differentiated from internal revenue sources. This includes not just companies, but also institutions. For example, a college or university might rely on external income to help it fund research. Rather than drawing upon internal sources of revenue to pay researchers and staff, maintain facilities, and cover other expenses, it could solicit grants and other money. External income might support extended or complex projects that would otherwise be difficult to fund.

Companies account for their external income on financial paperwork. This includes internal reports used to discuss finances, develop policy, and generate ideas for earning more money. External reports like tax declarations and annual reports for investors also cover this topic. It can be broken down by type and source to provide information about how the firm earns money and where these funds come from.

Remittances are sums of money sent remotely, usually across international borders. The term is particularly closely associated with funds sent home by overseas nationals. People may leave their home nations to take advantage of opportunities in different regions. As they earn money, they set some aside to send home to family members, either to support them or to help them save up enough money to relocate.

This external income can be a significant source of funds for some developing nations. Infusions of cash through overseas remittances may improve quality of life and standards of living, as people are no longer dependent solely on the domestic economy for support. Some economists suggest that this may provide an incentive to facilitate widespread employment of foreign nationals, as it can provide a mechanism for addressing inequality. A number of organizations study remittances and the impact of external income on economies in the developing world to learn more about how it works and its positive, as well as negative, effects. For example, it can create brain drain, where smart, talented people leave their home nations because of limited opportunities, seeking better wages and jobs elsewhere.