Get a better understanding of net income, how to calculate it using the formula, learn from practical examples, and check out tools to get started.
Did you know that in 2015, Twitter reported two non-GAAP positive earnings and one GAAP net loss of more than $500 million? Well, calculating these important metrics can prove to be a daunting task—even for big companies. There is more to the figures than what is displayed on your bank account balance.
Even so, that does not mean that you can't get accurate calculations of your company's net income. There are several formulas you can use to get the required metrics. Read on for a detailed insight into the net income formula and how you can use it to get accurate figur.
What is net income (NI)?
Net income is also known as net earnings. It's calculated as the overall sales revenue of a business minus the general expenses, costs of goods sold, taxes, operational costs, and any other expenses. To come up with an accurate net income, you need to take into account all the expenses.
One of the best ways to calculate net income is to use a net income formula. The formula is specially designed to help businesses or investors get accurate analytics of the profit earned by the company over a specific time. All you need to do is ensure that gross figures and expenses are placed in the required sections before calculations.
What is the difference between net income & gross income?
How does net income differ from gross income? Well, they're two critical metrics used to measure a company's profitability. Gross profit is the profit remaining after the deduction of production cost from the income generated from the sale of goods and services.
Net income, on the other hand, refers to the amount of money a business or an individual makes after expenses, allowances, deduction costs, or taxes have been deducted. Technically, as compared to gross profit, net income is more inclusive and is capable of providing you with more insight into the effectiveness of the management team.
When to use net income?
Net income can only be used after deduction of income taxes, operating expenses, depreciation costs, and interest on loans or debts. Note that expenses can also include wages, salary, raw materials, cost of goods, and taxes.
Net income can also be used in a company's income statement to show the overall profit gained after deductions on gross and expenses. The amount can be used to pay the shareholders, make investments, pay employee wages, or savings.
When to use gross income?
Gross income is typically used when filing income taxes or by lenders to determine what you can afford.
A simple net income formula
Net income is calculated using the formula:
revenue – costs of goods sold – expenses = net income
In a nutshell, the net income formula requires you to subtract the cost of goods sold and expenses from your gross income. The result can be a positive or negative net income.
If your business' revenue is more than the expenses for a given period, you'll have a positive net income. Conversely, if your business expenses are more than the total amount of revenue, you'll have negative results, which is also known as a net loss.
Examples of how to calculate net income
Here are two simple examples of net income to illustrate how the calculation works in the real world.
Every three months, Coca-Cola shares an audit report of its revenue. For the month ending April 2, 2021, the company reported:
- Total revenue: $9 billion
- Interest: $66 million
- Equity: $417 million
The company also had expenses amounting to $3.3 billion:
- Administrative costs: $2.7 billion
- Interest: $442 million
- Taxes: $508 million
- Operational costs: $124 million
After calculation, the overall net income for Coca-Cola is $5.709 billion.
Here is a quick breakdown of the math:
Gross income ($9 billion + $417 million + $66 million) – Expenses (2.7 billion + $442 million + $508 million + $124 million) = $5.709 billion (Net income)
Let's say Michael has a shop and wants to find the net income for the last couple of months. The numbers he'll be working with include:
- Total revenue: $60,000
- Cost of Goods Sold (COGS): $20,000
- Rent expenses: $6,000
- Utility expenses: $2,000
- Interest expenses: $1,000
- Payroll expenses: $10,000
- Advertising expenses: $1,000
Michael's gross profit should be the total of his revenue minus the cost of goods.
$60,000 (Total revenue) - $20,000 (Cost of goods) = $40,000 (Gross profit)
After calculating the gross profit, you can then calculate the net income. All you need to do is apply the net income formula of subtracting the expenses from the gross profit to come up with accurate figures. Michael's net income should be:
$40,000 (Gross profit) - $20,000 (Expenses) = $20,000 (Net income)
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There is no doubt that understanding the financial health of your business is critical. And here at Paddle, it's our goal to help you succeed by helping you track the most important metrics in your business. You can do this for free with ProfitWell Metrics. Tracking accurate revenue trends is key to calculating your net income. You can use it to either:
Net income formula FAQs
Is the net income different from gross income?
Yes, gross income is relatively larger than net income. It's the total revenue generated by an individual or a business without tax deductions or expenses. Net income is the profit after deductions and total expenses. It's relatively smaller and is also known as net earnings.
How do you calculate gross profit?
Gross profit is calculated by deducting the cost of goods from the total revenue. As compared to calculating net income, you don't need to subtract the expenses to get gross.
Is net income the same as the company's income statement?
No, it's not the same as a company's income statement. However, net income is also known as the bottom line because it's found at the bottom of a the income statement. It shows the profit gained after deductions of gross and expenses.