Business net income is the amount left you have left after all expenses, interests, or taxes are paid. It’s the total revenues that exceed any expenses, and is what your business can use to pay shareholders, invest on new ventures or projects, and pay off debts. In this article, we’ll discuss what net income is, how to calculate it, and why it’s important for the health and future of your business.
What Is Net Income?
Net income is the profit a company makes after paying all expenses. It’s good indicator of a company’s financial status and how well they manage their assets. It’s also referred to as your bottom line, net profit, or net earnings.
Investors focus closely on a company’s net income, since it’s how shareholders are paid. If a company is unable to generate profits to compensate them, the value of the shares decrease. Similarly, if a company is growing and thriving, shareholders have more access to higher profits.
The net income formula appears at the bottom of your income statement. Because depreciation and amortization (non-cash expenses) appear on your income statement, net income isn’t how much cash you’ve earned in an amount of time. This is called cash flow.
How to Calculate Net Income
To calculate your business’ net income, use a simple formula to measure both the revenue you have left and evaluate how profitable your company is.
Net Income Formula
The net income formula is simple: subtract your total expenses from total revenue.
For example, say Kyle’s clothing company brought in a revenue of $60,000 this quarter. His business expenses, including rent, operating costs, employee costs, inventory, liability insurance, and taxes equaled $30,000, making his net income $30,000.
Total Revenue ($60,000) – Total Expenses ($30,000) = Net Income ($30,000)
Kyle’s clothing company made $30,000 in profits this quarter, which he can use to invest back into the business.
You can find net income on the bottom of your income statement, like in the example below. Expenses are often broken down into categories like interest, operating costs, or taxes.
Why Net Income Matters
It’s helpful to calculate and look at your net income if you want a clear picture of how your company is performing. A negative net income may mean losses, whether it’s sales, customer management, or poor finance management. It’s helpful to dig deeper into how your business can improve financially or operationally.
Net income is an important number to follow in finance, particularly for investors. If a company can’t generate enough profit to compensate owners or shareholders, the value of their shares will sink. This happens frequently in startups, which have a 50 percent failure rate after 5 years of business.
You can determine how much proprietors, partnerships, or stockholders will profit. Lenders also focus on net income as a factor of business loans as criteria of whether you can afford payments or pay off any debts.
As a business, you’ll also pay tax on your net income, so it’s helpful to understand this when it’s time to prepare your taxes. Knowing your net income is important to managing a successful company. You can narrow down or evaluate what to cut costs on, improve your bottom line, and ultimately increase your profits.