How to Calculate Net Income
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To calculate net income, subtract your business expenses from your total revenue. This gives you a picture of your business’s profitability — that is, how much you’re earning after paying to operate your business.
In accounting, net income is sometimes called net earnings, net profit or “the bottom line.”
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What is net income?
Net income is your business profit after expenses have been deducted from your total revenue. Net income is not the same thing as gross income, which is simply your revenue minus the cost of goods sold. Net income takes into consideration all expenses for operating a business.
Revenue is the income a business generates from selling goods or providing services. In short, it’s all of the money your business has brought in regardless of any payments it has had to make along the way.
Expenses are the costs to operate a business. They can be fixed costs that repeat, such as monthly rent for an office, or variable expenses that are rarely the same amount despite occurring regularly, such as payroll.
Common business expenses include:
Rent and utilities.
Business insurance.
Administrative supplies such as computers.
Industry-specific equipment.
Advertising and marketing services.
Payroll.
Inventory.
Less obvious costs qualify as expenses as well. The loss of equipment’s value over time, known as depreciation, can be considered an expense, as can the repayment of business loan principal, referred to as amortization. All of these types of expenses should be used when calculating your net income.
Some businesses prefer to deduct taxes as part of their expenses to calculate net income for a more complete picture of quarterly or annual net income.
How to calculate net income
Calculating your business’s net income is as easy as subtracting your expenses from your revenue:
Net income = Revenue – expenses
Once you calculate your total revenue — all of your business’s income regardless of production or operating costs — tally up your total expenses for operating your business. This includes costs to produce products, offer services and carry out administrative duties. Subtract your total expenses from your total revenue to get your net income.
Net income calculation example
Here’s an example of how a business calculates net income: Danielle wants to figure out the net income for her coffee shop for the month. She looks at her books and has the following numbers:
Total revenue: $12,800. Rent and utilities: $2,400. Labor: $4,000. Inventory: $3,700. Advertising: $250. Administration: $400.
To calculate net income, Danielle subtracts her total expenses from her total revenue:
$12,800 (revenue) - $10,750 (expenses) = $2,050 (net income)
Danielle’s net income for the month is $2,050.
A business can have a positive or negative net income. If it is positive, the business is profitable. If net income is negative, the business is not profitable, or "takes a loss.”
You can find net income on a business's income statement, typically at or near the bottom. Businesses typically calculate net income monthly, quarterly and annually.
Net income calculator
Why net income is important
Net income is often a reflection of how well a business is operating and how well the market is responding to its products or services. This is why investors, lenders and analysts give a lot of weight to the number.
Lenders generally want to see your business’s performance — including the net income — before approving a loan; some lenders may require certain levels of net income performance from borrowers.
Because the net income calculation typically includes depreciation and other noncash expenses, it isn’t necessarily a measure of how much actual cash a business “put in the bank” during the period. In addition, accounting rules may affect when and how a business records revenue and expenses, which can in turn influence the outcome of the net income calculation.
Net income also determines the taxes a business pays for a given period, so it's important to understand how net income is calculated to ensure you're paying the proper amount.
