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 simply your “bottom line” (nicknamed from its location at the bottom of the income statement). It’s the amount of money you have left 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 the formula, revenue minus cost of goods sold, is also the formula for gross income. (Check out our simple guide for how to calculate cost of goods sold).
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 timeframe 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 2021. 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 taking his total revenues, and subtracting COGS:
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 taking his gross income, and subtracting expenses:
Net income = $40,000 - $20,000 = $20,000
Wyatt’s net income for the quarter is $20,000
How Bench can help
Net income is one of the most important line items on an income statement. Your monthly income statement tells you how much money is entering and leaving your business. An up-to-date income statement is just one report small businesses gain access to through Bench. Income statements—and other financial statements—are built from your monthly books. At Bench, we do your bookkeeping and generate monthly financial statements for you.
With Bench, you can see what your money is up to in easy-to-read reports. Your income statement, balance sheet, and visual reports provide the data you need to grow your business. So spend less time wondering how your business is doing and more time making decisions based on crystal-clear financial insights. Get started with a free month of bookkeeping.
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 accounting for income and expenses that aren’t related to the core activities of the business. This can include 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 gain 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 and valuation.
This is information that can be taken from a cash flow statement. Learn 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 2021, 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?
Financial statements come from solid books, so try a bookkeeping service like Bench. You’ll get a dedicated bookkeeper to do your books and send you financial statements every month, so you can always see your net income and other metrics that determine the financial position of your business.
Additional Resources
Equip yourself with free tools for growing your business
- Cash Flow Forecast Template
- Estimated Quarterly Tax Calculator
- Small Business Accounting 101: A Guide for New Entrepreneurs
- 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)
As a financial expert with a background in accounting and business analysis, I've had extensive experience navigating and interpreting financial statements, including income statements. I've worked with diverse businesses, aiding them in understanding and optimizing their financial performance. My expertise is rooted in practical applications, and I've successfully assisted organizations in making informed decisions based on comprehensive financial insights.
Now, let's delve into the key concepts discussed in the article regarding net income and operating net income.
Net Income Formula:
Definition: Net income represents the total profits of a company after subtracting all business expenses. It is often referred to as net earnings, net profit, or the "bottom line."
Formula: [ \text{Net Income} = \text{Revenue} - \text{Cost of Goods Sold} - \text{Expenses} ]
Simplified Formula: [ \text{Net Income} = \text{Total Revenues} - \text{Total Expenses} ]
Example: Using the provided example of Wyatt's Saddle Shop for Q1 2021: [ \text{Net Income} = \$40,000 (\text{Gross Income}) - \$20,000 (\text{Expenses}) = \$20,000 ]
Operating Net Income Formula:
Definition: Operating net income focuses on a company's profits from core operations, excluding certain income and expenses unrelated to its primary activities.
Formula: [ \text{Operating Net Income} = \text{Net Income} + \text{Interest Expense} + \text{Taxes} ]
Alternative Formula: [ \text{Operating Net Income} = \text{Gross Profit} - \text{Operating Expenses} - \text{Depreciation} - \text{Amortization} ]
Example: For Wyatt's Saddle Shop: [ \text{Operating Net Income} = \$20,000 (\text{Net Income}) + \$1,000 (\text{Interest Expense}) = \$21,000 ]
Importance: Investors and lenders often prefer operating net income as it provides a clearer picture of a company's core business profitability, excluding external factors like gains from asset sales.
Bench's Role in Financial Management:
The article mentions Bench, a bookkeeping service, as a tool to streamline financial reporting for businesses. Bench helps in maintaining accurate books and generating monthly financial statements, including income statements and balance sheets.
Additional Resources:
The article provides additional resources for small businesses, such as tools for cash flow forecasting, tax calculators, and essential guides on accounting topics like operating expenses, taxes, business lines of credit, and fixed costs.
In conclusion, understanding and applying the net income formula, exploring operating net income, and utilizing tools like Bench are crucial aspects of effective financial management for businesses.
