As a new business owner, growing sales might be one of your top objectives. Bringing in more cash flow will help support operations and allow you to grow and scale. However, top-line sales shouldn’t be your only focus.
To achieve long-term success, businesses must be able to turn a profit, meaning revenue outpaces spending — which you can gauge with net income.
Want to know how to calculate net income for your business? In this article, we’ll discuss how to calculate this metric for your business, what it means for your overall financial performance, and how it compares to other similar line items on the profit and loss statement.
Net income is a financial measure of what a business has earned after accounting for all operating and non-operating expenses.
It’s another term for “profits” or “earnings,” representing how much of the company’s revenue it was able to retain during a given period. You may even see it called the “after-tax profit” since it accounts for the business’s tax and interest payments in the calculation.
Net income is reported at the bottom of the profit and loss statement. For this reason, it’s often referred to as the company’s “bottom line,” signifying the portion of the revenue they kept as profit after subtracting all costs.
The formula for net income is quite simple and straightforward once you’ve gathered the appropriate inputs. You’ll find this value by subtracting operating costs and non-operating costs from the revenue.
Here is what the basic formula looks like:
Net income = Revenue – Expenses
Revenue includes all the income the company has generated from business activities.
The expense value is a sum of both operating and non-operating costs. As a reminder, operating costs include:
In this formula, the non-operating costs include:
You may break this calculation down through a series of steps, which will help you find other key financial performance metrics like gross profit, operating income, and pre-tax income, eventually leading you to net income.
Here’s how you start the net income calculator in accounting:
Gross profit = Revenue – Cost of goods sold (COGS)
From there, you can find the operating income with the following calculations:
Operating income = Gross profit – Operating expenses
Then, you can calculate the pre-tax income:
Pre-tax income = Operating income – Non-operating expenses
Finally, you can find the net income:
Net income = Pre-tax income – Taxes
Whichever method you choose, both will produce the same value for the company’s net income.
Learning how to get net income requires you to identify the appropriate values that go into the formula and then complete some simple subtraction.
To see what this might look like in practice, let’s complete an example using the quarterly figures from the ABC Law Firm, which were as follows:
We’ll start by subtracting each of the operating expenses from the total revenue:
$960,000
– 380,000
35,000
4,000
5,000
15,000
3,500
________________
$517,500
Now, we can find the firm’s pre-tax income by subtracting the interest expense from the operating income value:
$517,500
– 6,000
________________
$511,500
Finally, we can get the net income by subtracting the amount the company paid in taxes during the quarter:
$511,500
– 120,000
________________
$391,500
Conversely, you could have subtracted each of the expenses from the revenue value at once. Either way, you would come to the same quarterly net income of $391,500 for the law firm.
To get a better idea of how to find the net income and how it is reported on financial statements, let’s take a look at a real-world example using the country’s largest retailer, Walmart.
Here is a look at the company’s profit and loss statement from its latest quarterly filing in August 2024:
For the quarter ending on July 31, 2024, Walmart brought in total revenues of $169,335,000,000 from sales and memberships, which is the first value we need for the formula.
We’ll also need to know the total operating and non-operating expenses, which we can see from the financial statement have the following values:
The net income is found by subtracting each of these expenses from the total revenues, which results in a consolidated value of $4,711,000,000, as reported on the profit and loss statement. Thus, Walmart had profits of over $4.7 billion for the third quarter of 2024.
When assessing your company’s net income, you may see it alongside other financial terms, like revenue or sales. To those unfamiliar with finance and accounting, these may seem like they’re all referring to the same value. However, there are some distinct differences between net income and revenue that you should know about.
Revenue, or sales, is a business’s “top line.” It refers to the total amount of income generated in a given period from regular business activities. So, when an e-commerce store sells a clothing item, it’s recorded as revenue. For a SaaS company, this might be the monthly subscription fee a customer pays to use its software.
In contrast, a company’s net income is the portion of revenue it keeps after accounting for all operating and non-operating expenses. Reflecting on the formula we discussed above, you’ll need to know the company’s revenue to determine the net income. However, it will always be lower than the total revenue.
While business leaders may be interested in both values, it’s important to remember that net income describes the company’s profitability, while revenue is a better measure of the company’s ability to generate sales for its goods and services. If you have additional questions about your revenue and financial management, the team at Bob’s Bookkeepers can help.
It’s also important to distinguish between net income and operating income. These two terms can be more tricky to tell apart than revenue or sales. However, they are still not interchangeable.
As discussed previously, operating income is equal to gross profit minus operating expenses. This means you’ll need to first find the gross profit, which you can calculate by subtracting the cost of goods sold from total revenue.
The key difference between the two is that net income also takes into account non-operating expenses and income taxes. This means it will always be a lower value than operating income.
Using the above example with Walmart, the operating income for the reporting period was $7.9 billion, while the net income was lower at $4.7 billion.
As a business owner, what does the net income calculation tell you about your operations? From a high level, it gives you a good idea of the company’s profitability. After considering all expenses in a given month, quarter, or year, the operating income is everything the business will get to retain. All things considered equal, most businesses aim to increase their net income each year, representing efficiency improvements and a higher profit margin.
Since the net income formula in accounting depends on both revenue and expenses, net income can improve even if sales numbers remain the same. For instance, the company can still increase net income by lowering expenses in a year where revenue growth is stagnant.
Businesses have a few options regarding what they can do with the net income they’ve earned in a given period. Some companies will distribute a portion of it to shareholders via dividend payments. Or, the company might choose to reinvest the funds back into the company to pursue further growth initiatives.
Calculating net income isn’t just for business. There’s also a way for individuals to calculate and track this metric.
Like a business, the net income value for individuals will tell them how much of their income remains after any deductions and taxes. It’s what’s commonly referred to as “take-home pay,” meaning the amount that they actually receive from their paycheck.
To find this value, the amount an employee earns — their gross wages — will be reduced by payroll deductions like health insurance, retirement contributions, and taxes. What’s left is their net pay.
For example, let’s say an individual has an annual salary of $55,000, meaning their gross pay is $1,057.69 every week. This person has a marginal tax rate of 22%, and we’ll assume their paycheck is deducted by federal and state taxes of 5% and Social Security and Medicare (FICA) at 7.65%.
This breaks down into the following deductions:
Subtracting each of these values from the gross pay gives us the person’s net income for each paycheck:
$1,057.69
– $232.69
$80.91
$52.88
_________________
$691.21
So, the person will actually take home $691.21 each week and $35,943.04 annually from their $55,000 salary.
Net income is the bottom line of the profit and loss statement and a critical value for most businesses to monitor. While commonly confused with other values like revenue, gross profit, or operating income, net income represents total profits after subtracting all expenses, interest, and taxes for the period.
To speak with an expert about your company’s profitability and other financial management concerns, contact us at Bob’s Bookkeepers today.
