{"id":7114,"date":"2023-07-28T10:06:05","date_gmt":"2023-07-28T16:06:05","guid":{"rendered":"https:\/\/www.blockadvisors.com\/resource-center\/?p=7114"},"modified":"2024-04-19T08:57:52","modified_gmt":"2024-04-19T14:57:52","slug":"what-is-net-income","status":"publish","type":"post","link":"https:\/\/www.blockadvisors.com\/resource-center\/manage-your-business\/what-is-net-income\/","title":{"rendered":"Net income: uses, formula, and how to calculate"},"content":{"rendered":"\n<p>KEY TAKEAWAYS:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><em>Net Income<\/em> = Gross Income \u2013 Total Expenses<\/li>\n\n\n\n<li>It is the amount of money your business makes after deducting cost of goods sold (including returns &amp; allowances), operating expenses, and taxes.<\/li>\n\n\n\n<li>Often called \u201cthe bottom line\u201d because it is found on the last line of your company\u2019s <a href=\"https:\/\/www.blockadvisors.com\/resource-center\/finance\/what-is-an-income-statement\/\">income statement<\/a>.<\/li>\n<\/ul>\n\n\n\n<p>As a small business owner, <a href=\"https:\/\/www.blockadvisors.com\/resource-center\/self-employed\/business-or-hobby\/\">generating profit is a top priority<\/a>. But it\u2019s important to understand that the revenue you earn won\u2019t always tell you the whole story. You need other information to get an accurate picture of how your business is doing. Net income is one piece of data that will help you understand your business\u2019 health. It is a good indicator of your company\u2019s profitability. Taking the time to learn how to calculate net income is crucial.<\/p>\n\n\n\n<div class=\"wp-block-create-block-hrb-large-article-cta\" class=\"wp-block-create-block-hrb-large-article-cta\" style=\"background-color:#005d1f\"><div class=\"hrb-large-article-cta--image\" style=\"background-image:url(&quot;https:\/\/www.blockadvisors.com\/resource-center\/wp-content\/uploads\/2023\/04\/block-advisors-endorsement-logo-1_white-1.png&quot;);background-size:contain;background-position:center;background-repeat:no-repeat\"><\/div><div class=\"hrb-large-article-cta--copy #ffffff\"><h3 class=\"main-heading\">Bookkeeping for up to 50% less<\/h3><p class=\"main-copy\">Save time &amp; money with our small business bookkeeping services<\/p><div class=\"quick-links-list\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link wp-element-button\" href=\"https:\/\/www.blockadvisors.com\/small-business-bookkeeping-services\/\">Keep your books in top form<\/a><\/div>\n<\/div><\/div><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-net-income\">What is net income?<\/h2>\n\n\n\n<p>Net income (NI), sometimes called net earnings, refers to the amount of money a business makes over a given period of time after deducting costs, allowances, and taxes. Along with revenue and other key financial figures, NI is regarded as an important number in accounting.<\/p>\n\n\n\n<p>Net income is typically found on the last line of your company\u2019s <a href=\"https:\/\/www.blockadvisors.com\/resource-center\/finance\/what-is-an-income-statement\/\">income statement<\/a>, which is why it\u2019s also sometimes called \u201cthe bottom line.\u201d<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Why is net income important for small businesses?<\/h2>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"alignright size-large is-resized\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"536\" src=\"https:\/\/www.blockadvisors.com\/resource-center\/wp-content\/uploads\/2023\/07\/What-is-Net-Income-1024x536.jpg\" alt=\"A document that breaks down what is net income\" class=\"wp-image-7117\" style=\"width:256px;height:134px\" srcset=\"https:\/\/www.blockadvisors.com\/resource-center\/wp-content\/uploads\/2023\/07\/What-is-Net-Income-1024x536.jpg 1024w, https:\/\/www.blockadvisors.com\/resource-center\/wp-content\/uploads\/2023\/07\/What-is-Net-Income-300x157.jpg 300w, https:\/\/www.blockadvisors.com\/resource-center\/wp-content\/uploads\/2023\/07\/What-is-Net-Income-768x402.jpg 768w, https:\/\/www.blockadvisors.com\/resource-center\/wp-content\/uploads\/2023\/07\/What-is-Net-Income.jpg 1200w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n<\/div>\n\n\n<p>Net income is a key metric for small businesses and small business owners to understand. NI gives insight into your small business\u2019s profitability and thus is extremely useful to know. For small business owners, keeping track of this metric might seem daunting at first. It may even be something you wait to do until asked by a lender or investor. But keeping track of your NI is a great way to monitor the financial health of your business.<\/p>\n\n\n\n<p>Speaking of <a href=\"https:\/\/www.blockadvisors.com\/resource-center\/small-business-services\/trouble-getting-a-loan\/\">lenders<\/a> and <a href=\"https:\/\/www.blockadvisors.com\/resource-center\/small-business-services\/raising-capital-for-a-startup\/\">investors<\/a> \u2013 having your NI calculations available to them is important. Before handing over any funds, they need to make sure you and your company are in a stable financial position. Lenders and investors often want to confirm you have enough money to pay back debts. They may also be interested in how much money your business has available for dividends, reinvestment, emergency funds, etc.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">How to calculate net income<\/h2>\n\n\n\n<p>To calculate net income for your business, start with the gross income. Gross income is the total revenue generated by the business after subtracting cost of goods sold (COGS).<\/p>\n\n\n\n<p class=\"has-text-align-center\"><strong><em>Gross Income = Total Revenue \u2013 Cost of Goods Sold<\/em><\/strong><\/p>\n\n\n\n<p>Then, subtract other expenses (rent, utilities, taxes, etc.) from the gross income to find NI. If you\u2019re wondering, taxes in this case includes things like excise taxes, payroll taxes, and property taxes. It does not refer to business income taxes. So, the formula for net income is:<\/p>\n\n\n\n<p class=\"has-text-align-center\"><strong><em>Net Income = Gross Income \u2013 Other Expenses<\/em><\/strong><\/p>\n\n\n\n<p>You can also calculate the net profit margin by dividing your net income by revenue and multiplying it by 100 to get a percentage. This percentage will show how much money you bring in from each dollar of revenue. Read more about this topic in this article all about <a href=\"https:\/\/www.blockadvisors.com\/resource-center\/manage-your-business\/how-to-calculate-profit-margin\">profit margin<\/a> calculation.<\/p>\n\n\n\n<p>When your business revenue outweighs expenses, you\u2019ll have a positive net income. On the other hand, if your total expenses are greater than your revenue, you\u2019ll have a negative net income \u2013 <a href=\"https:\/\/www.blockadvisors.com\/resource-center\/small-business-tax-prep\/claiming-business-loss-deduction\/\">a net loss<\/a>.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">A small business calculation example<\/h2>\n\n\n\n<p>Want to see the formulas above in action? Refer to the example below, which breaks down how net income is calculated for a small business.<\/p>\n\n\n\n<p>If calculating net income isn\u2019t your idea of a good time, don\u2019t worry. Block Advisors bookkeeping experts can help. With both starter and full-service bookkeeping options, you can get assistance at any stage. <a href=\"https:\/\/www.blockadvisors.com\/small-business-bookkeeping-services\/\">Make an appointment to learn more<\/a>.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Sweet Treats Bakery net income calculation<\/h3>\n\n\n\n<p>Let\u2019s look at the fictional company &#8220;Sweet Treats Bakery&#8221;. The company\u2019s accountant wants to know how the bakery is doing in the first quarter (Q1). Sweet Treats&#8217; <a href=\"https:\/\/www.blockadvisors.com\/resource-center\/finance\/what-is-an-income-statement\/\">income statement<\/a> shows the following information:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Total Sales Revenue:<\/strong> $100,000<\/li>\n\n\n\n<li><strong>Cost of Goods Sold (COGS):<\/strong> $30,000<\/li>\n\n\n\n<li><strong>Operating Expenses:<\/strong> $20,000<\/li>\n\n\n\n<li><strong>Interest Expense:<\/strong> $2,000<\/li>\n\n\n\n<li><strong>Taxes:<\/strong> $8,000<\/li>\n<\/ul>\n\n\n\n<p>First, the accountant begins by calculating gross income:<\/p>\n\n\n\n<p class=\"has-text-align-center\"><strong><em>Gross Income = Total Revenue \u2013 Cost of Goods Sold<\/em><\/strong><\/p>\n\n\n\n<p class=\"has-text-align-center\"><em>$100,000 &#8211; $30,000 = $70,000<\/em><\/p>\n\n\n\n<p class=\"has-text-align-center\">Sweet Treats\u2019 gross income is <strong>$70,000<\/strong> for Q1.<\/p>\n\n\n\n<p>Next, the accountant will add up the other business expenses:<\/p>\n\n\n\n<p class=\"has-text-align-center\"><strong><em>Total Expenses = Operating Expenses + Interest Expense + Taxes + Other Expenses<\/em><\/strong><em> <\/em><\/p>\n\n\n\n<p class=\"has-text-align-center\"><em>$20,000 + $2,000 + $8,000 = $30,000<\/em><\/p>\n\n\n\n<p class=\"has-text-align-center\">Sweet Treats\u2019 total other expenses are <strong>$30,000<\/strong> for Q1.<\/p>\n\n\n\n<p>Finally, to calculate NI, the accountant subtracts total expenses from gross income:<\/p>\n\n\n\n<p class=\"has-text-align-center\"><strong><em>Net Income = Gross Income &#8211; Total Expenses<\/em><\/strong><\/p>\n\n\n\n<p class=\"has-text-align-center\"><em>$70,000 &#8211; $30,000 = $40,000<\/em><\/p>\n\n\n\n<p class=\"has-text-align-center\">Sweet Treats\u2019 NI is <strong>$40,000<\/strong> for Q1.<\/p>\n\n\n\n<p>Remember that this is a simplified example. Actual calculations may involve more complex factors and additional deductions. It all depends on the business in question and its specific expenses.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Calculating NI: the bottom line<\/h2>\n\n\n\n<p>Net income gives important insight into a business\u2019s profitability. By using the net income formula, you have a better understanding of where your company stands financially. Even if your business shows significant revenue at the end of a quarter, your financial overview won\u2019t be complete until you factor in all expenses and business spending to calculate net income.<\/p>\n\n\n\n<p>If you need help keeping track of NI and other important metrics, Block Advisors has your back. You can save time and money with our bookkeeping services.<\/p>\n\n\n\n<p><a href=\"https:\/\/www.blockadvisors.com\/small-business-bookkeeping-services\/\">Learn more about bookkeeping options &gt;&gt;<\/a><a id=\"_msocom_1\"><\/a><\/p>\n\n\n\n<hr class=\"wp-block-separator aligncenter has-alpha-channel-opacity\"\/>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-large is-resized\"><a href=\"www.blockadvisors.com\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"436\" src=\"https:\/\/www.blockadvisors.com\/resource-center\/wp-content\/uploads\/2022\/08\/HRB-Block-Advisors-Logo-1024x436.jpg\" alt=\"Block Advisors by H&amp;R Block logo\" class=\"wp-image-6406\" style=\"width:256px;height:109px\" srcset=\"https:\/\/www.blockadvisors.com\/resource-center\/wp-content\/uploads\/2022\/08\/HRB-Block-Advisors-Logo-1024x436.jpg 1024w, https:\/\/www.blockadvisors.com\/resource-center\/wp-content\/uploads\/2022\/08\/HRB-Block-Advisors-Logo-300x128.jpg 300w, https:\/\/www.blockadvisors.com\/resource-center\/wp-content\/uploads\/2022\/08\/HRB-Block-Advisors-Logo-768x327.jpg 768w, https:\/\/www.blockadvisors.com\/resource-center\/wp-content\/uploads\/2022\/08\/HRB-Block-Advisors-Logo-1600x682.jpg 1600w, https:\/\/www.blockadvisors.com\/resource-center\/wp-content\/uploads\/2022\/08\/HRB-Block-Advisors-Logo-1536x655.jpg 1536w, https:\/\/www.blockadvisors.com\/resource-center\/wp-content\/uploads\/2022\/08\/HRB-Block-Advisors-Logo-1200x511.jpg 1200w, https:\/\/www.blockadvisors.com\/resource-center\/wp-content\/uploads\/2022\/08\/HRB-Block-Advisors-Logo.jpg 1800w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/a><\/figure>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>KEY TAKEAWAYS: As a small business owner, generating profit is a top priority. But it\u2019s important to understand that the\u2026<\/p>\n","protected":false},"author":1,"featured_media":7116,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1237,15],"tags":[],"class_list":["post-7114","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-manage-your-business","category-small-business-services"],"acf":[],"yoast_head":"<title>What is net income &amp; how to calculate it | Block Advisors<\/title>\n<meta name=\"description\" content=\"Learn the definition of net income &amp; how to calculate net income vs. gross income. 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