Businesses can calculate net income by taking their total incoming revenue for a specific time period and subtracting from it all business expenses for that same time period.
For the first quarter of 2019, let’s say ABC Enterprises brought in $100,000 in sales (income). During that time, ABC Enterprises spent $25,000 on various business expenses.
For Q1 of 2019, ABC Enterprises has a net income of $75,000.
Gross Income vs. Net Income
Gross income for businesses is the total incoming revenue minus only the cost of goods sold (COGS). (For individuals, it’s just total incoming revenue or sales—period.)
Net income for businesses is the total incoming revenue minus the cost of goods sold AND all other business expenses, including:
- Administrative and operating expenses
- Other expenses
Gross income for businesses takes into account all incoming revenue minus the cost the business incurs to sell goods and services. Net income factors in the cost of sales and business expenses not related to the sales process. Gross income factors in only sales-related expenses, net income factors in ALL business expenses.
Calculating Net Income on the Income Statement
Net income is the result of the income statement calculation. It’s the final figure all the way at the bottom of the income statement.
To calculate net income on the income statement, first take all sources of revenue and record them at the top. Add them together for total revenue. Next, record all expenses related to the cost of goods sold (COGS). Add them up to get total cost of sales. Then record all other business expenses not related to the cost of sales, and combine them to determine the total other expenses.
Find net income by adding together the total cost of sales and the total other expenses, and subtracting that number from total revenue. Here’s the calculation:
Net Income = Total Revenue – (Total Cost of Sales + Total Other Expenses)
What Net Income Can Tell Business Owners
First and foremost, net income helps business owners understand whether their business is profitable or not. By taking the total incoming revenues and subtracting out all other expenses, business owners can see if they are making a profit or a loss. Profitability is a critical metric for long-term success.
Beyond that, net income can be used in determining the overall health of a profitable business. It’s not a standalone metric, as it can be influenced by factors like large, one-time charges, or even investment windfalls.
However, business owners (and investors) can review net income from subsequent time periods to see if it is increasing, decreasing, or staying the same. They can compare the net incomes of similar businesses for the same time period by calculating the net income as a percentage of total sales.
Like other key financial metrics, net income is a starting point. Small businesses struggling with decreasing net income can use it to start to dig deeper. Are operating expenses increase at a much faster clip than sales? Or are sales decreasing and the cost of sales is staying the same? These are all questions that business owners can use to troubleshoot problems.
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