How do you Calculate Net Income
Your business depends on revenue to grow. Revenue, however, doesn’t give you the most accurate financial picture of your organization. To determine whether you’re actually earning money after you pay your business expenses, you need to understand your net income.
By doing so, you can figure out how profitable you are and decide if you want to expand, bring on investors, and make other meaningful changes to your business. Let’s take a closer look at what net income is and how you can calculate it.
What is Net Income?
Simply put, net income is your total profits after you deduct your expenses from your revenue. Also known as net profit, net earnings, or your bottom line, net income can be positive or negative. Your net income will be positive if you have more revenues than expenses.
On the contrary, if your expenses exceed your revenues, you’ll be left with a negative net income, or a net loss. You may decide to calculate your net income on a monthly, quarterly, or yearly basis. It all depends on your unique business needs, preferences, and resources.
Net Income vs. Gross Income
Gross income (or Gross Profit) is the total incoming revenue your business earns minus the cost of goods sold, which is the price of labor and/or materials you use to sell your products and/or services. Net income is the total incoming revenue minus costs of goods sold AND all other business expenses. Several examples of these expenses include:
- Operating & Administrative expenses
- Sales & Marketing
- Professional Services
- Interest
- Taxes
Put simply, gross income only considers the cost your business incurs to sell your products and services. Net income takes other business expenses that aren’t necessarily related to the sales process into account.
Net Income Formula
Fortunately, it’s fairly simple to calculate your net income. First and foremost, you’ll need to determine your gross income with this formula:
Gross Income = Revenue – Cost of Goods Sold
Then, you can use the cost of good sold figure to calculate your net income with this formula:
Net Income = Gross Income – Expenses
Once you come up with your net income, record it on your income statement. Your income statement will allow you to see how profitable your business is as it reports your profits and losses over a specific period of time.
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