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If you don’t have revenue, you don’t have a business. But knowing your revenue alone won’t give you an accurate picture of your business results. To get that, you need to know whether your business is profitable after subtracting business expenses. That’s where the net income formula comes in. (If you want to read more on why net income is important, we’ve got you covered)
Net income formula
Net income is your company’s total profits after deducting all business expenses. Some people refer to net income as net earnings, net profit, or the company’s bottom line. It’s the amount of money you have left over to pay shareholders, invest in new projects or equipment, pay off debts, or save for future use.
The formula for calculating net income is:
Revenue – Cost of Goods Sold – Expenses = Net Income
The first part of that formula, revenue minus cost of goods sold, is also the formula for gross income. (You can learn all you need to know about cost of goods sold in our 7 minute guide)
So put another way, the net income formula is:
Gross income – Expenses = Net Income
Or if you really want to simplify things, you can express the net income formula as:
Total Revenues – Total Expenses = Net Income
Net income can be positive or negative. When your company has more revenues than expenses, you have a positive net income. If your total expenses are more than your revenues, you have a negative net income, also known as a net loss.
Using the formula above, you can find your company’s net income for any given period: annual, quarterly, or monthly—whichever time frame works for your business.
Net income formula: an example
Let’s say Wyatt’s Saddle Shop wants to find its net income for the first quarter of 2020. Here are the numbers Wyatt is working with:
- Total revenues: $60,000
- Cost of goods sold (COGS): $20,000
- Rent: $6,000
- Utilities: $2,000
- Payroll: $10,000
- Advertising: $1,000
- Interest expense: $1,000
First, Wyatt could calculate his gross income by subtracting COGS from total revenues:
Gross income = $60,000 - $20,000 = $40,000
Next, Wyatt adds up his expenses for the quarter.
Expenses = $6,000 + $2,000 + $10,000 + $1,000 + $1,000 = $20,000
Now, Wyatt can calculate his net income by subtracting expenses from gross income:
Net income = $40,000 - $20,000 = $20,000
Wyatt’s net income for the quarter is $20,000
Operating net income formula
Another useful net income number to track is operating net income. Operating net income is similar to net income. However, it looks at a company’s profits from operations alone, without taking into account income and expenses that aren’t related to the core activities of the business. This includes things like income tax, interest expense, interest income, and gains or losses from sales of fixed assets.
Operating income is sometimes referred to as EBIT, or “earnings before interest and taxes.”
The formula for operating net income is:
Net Income + Interest Expense + Taxes = Operating Net Income
Or, put another way, you can calculate operating net income as:
Gross Profit – Operating Expenses – Depreciation – Amortization = Operating Income
Investors and lenders sometimes prefer to look at operating net income rather than net income. This gives them a better idea of how profitable the company’s core business activities are.
For example, a company might be losing money on its core operations. But if the company sells a valuable piece of machinery, the game from that sale will be included in the company’s net income. That gain might make it appear that the company is doing well, when in fact, they’re struggling to stay afloat. Operating net income takes the gain out of consideration, so users of the financial statements get a clearer picture of the company’s profitability.
This is information that can be taken from a cash flow statement. Learn more about cash flow statements and why they are the ideal report to understand the health of a company.
Operating net income formula: an example
Let’s return to Wyatt’s Saddle Shop. If Wyatt wants to calculate his operating net income for the first quarter of 2020, he could simply add back the interest expense to his net income.
$20,000 net income + $1,000 of interest expense = $21,000 operating net income
Calculating net income and operating net income is easy if you have good bookkeeping. In that case, you likely already have a profit and loss statement or income statement that shows your net income. (Get a refresher on income statements in our CPA reviewed guide) Your company’s income statement might even break out operating net income as a separate line item before adding other income and expenses to arrive at net income.
Don’t have financial statements? Try a bookkeeping service like Bench. We’ll pair you with a bookkeeper to do your books, and we’ll send you financial statements every month, so you can always see your net income in the context of your business.
Equip yourself with free tools for your business
- Cash Flow Forecast Template
- Estimated Quarterly Tax Calculator
- Small Business Accounting 101: A Guide for New Entrepreneurs
- 2020 U.S. Small Business Tax Checklist
Learn more bookkeeping essentials
- Operating Expenses: A Complete Guide (4 minute read time)
- How Much Are Taxes for a Small Business? (7 minute read time)
- Business Line of Credit: How Does it Work (7 minute read time)
- Fixed Costs: Everything You Need to Know (5 minute read time)
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