How To Calculate Net Income

Net income is the amount of money that a company has left over after all of its expenses have been deducted from its total revenue. It is typically the amount that a business has to put towards shareholder dividends, investments and other projects. Calculating net income is an important step in both short-term and long-term financial planning.

The formula to calculate net income is to subtract total expenses from total revenue. To start, record the company’s total revenue generated from the sale of goods or services. Then, subtract from that number any costs associated with earning that revenue, such as cost of goods sold, rent, payroll, taxes, and other expenses. The remaining figure is the net income.

For example, if a company had $200,000 in revenue, and $160,000 in expenses, the equation would look like this:

Revenue: $200,000

Less Expenses: ($ 160,000)

Net Income: $40,000

In addition to the formula-based approach, there are additional ways to assess net income. Companies can also choose to use the statement of cash flows or the income statement. The statement of cash flows provides insights into a company’s ability to generate cash by detailing the movement of cash within the business. The income statement presents a broad view of the company’s performance by noting total revenues, total expenses, and net income.

It is important to note that net income and net profit are not interchangeable terms. Net profit is the company’s total revenue minus its expenses and costs. Net income is specifically the amount that’s left over after taxes and other deductions have been made.

By carefully monitoring net income, businesses can assess their financial health, position themselves for growth and make informed decisions about where their money should be allocated for most impact. Calculating net income is an essential step for any business and understanding how to do so can help set a company up for effective and helpful money management.