Net income refers to the money left over after expenses are deducted from a company’s revenue. Measuring net income is important for several reasons, helping businesses to better understand their financial position.
But why does net income matter so much? To learn more about net income and the importance it holds in business, continue reading.
What is Net Income?
Net income, commonly known as net profit, represents the profit of a company after all expenses have been deducted from the total revenue.
Essentially, it provides businesses with a clear picture of their financial health, which in turn, allows for making sustainable profits. Your business’s net income can be found on your income statement, which is also commonly referred to as a profit and loss (P&L) statement.
How to Calculate Net Income for Businesses
The calculation of net income includes the deduction of all business expenses, typically including:
- Costs of goods that were sold
- Operating expenses
- Employee salaries
- Taxes
- Insurance
The formula to calculate net income is pretty simple. To calculate your business’s net income, you need to deduct all expenses (including taxes) from your total revenue. The formula would look like this:
Net income = total revenue – all expenses.
Why is Net Income Important?
Net income is a key financial metric, allowing businesses to assess both their financial health and performance. Assessing your net income means you can:
- Evaluate profitability
- Make strategic decisions
- Set goals
- Identify areas requiring financial improvement
- Monitor financial trends
- Compare to competitors
- Plan financially for the future
Without assessing net income, your business will likely struggle. Knowing the profitability of your business is key to success. How your business performs financially will give a good indication of how well your business will go in the near future. For many, net income serves as the best decision-making tool.
Negative Net Income
Negative net income shows that a business has had to pay out more expenses compared to the amount they’ve made in revenue over a certain period.
Unlike positive net income, negative net income means that your business is operating at a loss. This can be detrimental to your business, with the potential to cause closure if the net income is negative for a long time.
However, in many cases, businesses can successfully recover from dealing with short periods of negative income.
Net vs Gross Income: Are They the Same?
Is net income and gross income the same? No, net income and gross income are not the same. However, it’s understandable why the two get confused.
There are many financial terms to be aware of while running a business, and knowing which term is which can be difficult to decipher. To make it a little easier for you, we’ve separated the two key differences between net income and gross income.
| Net Income | Gross Income |
|---|---|
| The amount of profit your business makes after all expenses are deducted | The amount of profit your business makes before all expenses are deducted |
| Provides insight into financial health and business profitability | Provides insight into a business’s ability to make revenue |
Where to Find Your Net Income
As mentioned, net income can be found on the bottom line of a company’s income statement (also known as a P&L statement). An income statement is one of the most important documents used for assessing a company’s yearly financial performance.
Understanding Income Statements
Income statements provide key financial information regarding your business. As well as stating your net income, income statements also include:
- Revenue – how much your business has brought in
- Expenses – how much your business spends
- Gross profit – how much your business earns after taking away the costs of goods sold
- Sales costs – how much it costs to produce the goods or services your business provides
Typically, income statements are prepared monthly, quarterly, or yearly. They’re a vital document used in business, providing insight into how your business manages and performs financially over a certain period.
Income statements aren’t only beneficial to businesses but to those looking to invest. Investors will use income statements to decide whether or not your business looks profitable. Trusted accountants are usually responsible for preparing income statements for businesses.
Should You Prepare Your Own Income Statement?
Yes, you can prepare your own income statements, but that doesn’t mean that you should. Typically, an accountant will handle the preparation of income statements. These important financial statements provide insight into the activities of your business, and they must be created correctly.
By working with an accountant, you can rest assured knowing that someone knowledgeable and experienced is preparing your income statements. Accountants not only ensure compliance but provide an accurate representation of how well your business has performed.
Seeking a Reliable Accountant
Our expert accountants at DH Business Support are ready and waiting to assist you. We’re a friendly and reputable team, with a wealth of experience and knowledge working with a range of clients from diverse industries.
We want to free you from financial admin and allow you more time to enjoy running your business. With us, you can relax knowing that our finance specialists will take care of all of your finance functions while remaining on hand to offer advice and support when needed.
We hone in on your business goals, providing you with constant visibility of your performance. This way, you can ensure that your business maintains a good net income.
To discuss our services further, please contact us today!