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The Ultimate Guide to Net Income Calculation: Formulas and Examples

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October 12, 2023

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Calculate Net Income From Balance Sheet
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Your business’s net income is the metric that will tell you how much you earned in a particular period (year, month, or quarter). An income statement of your financial statement will provide you with an insight into your operating income and net income.

While the operating profit is your income generated out of the primary operations of your business, the net income is a measurement that will indicate how much money you have after deducting all expenses from your income.

Many accountants confuse net income with operating and cash income, but net income is not one of them.

Let’s learn how to calculate net income from the balance sheet, its components, net income formula, and operating net income.

The majority of the pre-revenue companies have negative net income (net loss) because initially, they spend and invest money in product development.

In contrast, significant revenue starts flowing into the business after some period.

Let’s study the net income formula and understand how to calculate the net income from the balance sheet.

Net Income Formula

You can calculate net income using the comprehensive method and the simplified method.

  • Comprehensive Method

    In this method, net income is derived by deducting the cost of goods sold (COGS) and expenses from the business’s total revenue. You can calculate the net income using the below formula:

    Revenue – Cost of Goods Sold – Expenses = Net Income

    Net income is often referred to as ‘net profit,’ or ‘net earnings,’ or many calls it ‘bottom line’ since it appears at the bottom of the income statement. You simply need to take all income you earned and deduct all expenses you incurred in a specified period for which you want to calculate your net income.

    Net income is used to incur daily costs, pay off your business debts, make capital investments, and pay shareholders or retained them for future use.

  • Simplified Method

    This method of calculating net income uses gross income and deducts total expenses from the same. The simplified formula for net income is listed below:

    Gross Income – Expenses = Net Income
    Total Income – Total Expenses = Net Income

    The simplified method works on the logic to deduct all expenses from the total income received for your business. It is the simplest way to measure the profitability of your startup.

Net income may not always be positive. Pre-revenue startups mostly have a negative net income, called a net loss.

Your net income can be positive or negative, and when it is negative, it indicates that your expenses were higher than the income you generated for your business.

Let’s understand the net income formula with the help of an example:

Net Income Formula: An Example

Suppose a clothing retailer in Houston, Green Leaf LLC, wants to calculate his net business income for the calendar year 2021. He has the following details with him:

Particulars Amount
Total Revenue $85,000
Cost of Goods Sold $33,000
Salary $12,000
Electricity $2,500
Office Rent $5,500
Marketing Expenses $1,900
Interest on Loan $1,100
Taxes $1,000

Let’s help the retailer in calculating his business net income using both methods:

  • Net Income Calculation Using Comprehensive Formula

    Revenue – Cost of Goods Sold – Expenses = Net Income

    Hence, $85,000 – $33,000 – ($12,000+$2,500+$5,500+$1,900+$1,100+$1,000) = $28,000

    The net income of Green Leaf LLC is $28,000.

  • Net Income Calculation Using Simplified Formula

    Gross Income – Expenses = Net Income

    Where, Gross Income = Revenue – Cost of Goods Sold = $85,000-$33,000 = $52,000

    And Expenses = $12,000+$2,500+$5,500+$1,900+$1,100+$1,000 = $24,000

    Net Income = $52,000 – $24,000 = $28,000

Key Components of Net Income

You will need certain minimum items from the balance sheet to calculate the net income of your business. Let us break down the formula and understand each component of the net income formula to calculate your net income accurately.

Key Components of Net Income

  • Revenue:

    You need to know your business’s total revenue to derive how much net income you have generated in a period. Revenue refers to the income you generate from your business, and it will include all other revenues, such as profit from the sale of an asset.

  • Cost of Goods Sold

    When you deduct the cost of goods sold from the revenue, you get the gross income. The cost of goods sold (COGS) refers to the expenses incurred to run your business’s main operations, such as raw material costs.

  • Expenses

    From the gross income, you must deduct the other expenses to derive the net income. These expenses include office rent, utility expenses, etc.

Why is Business Net Income So Important?

Why is Business Net Income So Important

Apart from measuring the business profitability, your business net income will help you understand how efficiently you used your resources to generate revenue for your business.

While negative net income is unfavorable for any business, for new startup businesses, it is quite normal to have negative net income in the initial 2-3 years.

However, if it continues longer, it is an alarming signal that the business may not be successful. Hence, your business’s success lies within your income statement. Your income statement analysis will allow you to manage your expenses and put effort into increasing your net income.

Don’t panic if you have a negative net income once in a while; it will help you understand where your business went wrong. For new startups, it is quite normal to be in a pre-revenue stage (negative net income) for the initial years.

Operating Net Income Formula

Since the operating net income is a net income before deducting interest and tax expenses, you can calculate it by adding these expenses to the net income:

Net Income + Interest + Taxes = Operating Net Income

Alternatively, your operating net income can also be derived as follows:

Revenue – Cost of Goods Sold – Expenses except for interest and Taxes = Operating Net Income

Operating Net Income Formula: An Example

Let’s take the same clothing retailer’s example where his interest expense is already given in the table amounting to $1,100 and his tax expense of $1,000 for that period.

In this case, his net operating income = $28,000 + $1,100 + $1,000 = $30,100.

Or, net operating income = $85,000 – $33,000 – ($24,000-$1,100-$1,000) = $30,100

While net income measures the overall profitability of your business, the operating net income calculates the profitability of the main operations of your business.

Concluding Thoughts

It is quite simple to calculate the net income if you have all the necessary details. However, interpreting your net income and taking the right actions after calculating your net income makes a huge difference.

Your net income can be used to calculate multiple ratios, and these ratios can help you understand the financial performance of your business. Calculate your net income accurately and use it wisely because that will lead you to a successful business.

How Can Upmetrics Help?

At Upmetrics, we have smart solutions to help you calculate your net income and provide insightful analysis of the operating efficiency of your business. We have developed user-friendly software that will require minimal effort from you as the maximum work is done using various tools in our software.

About the Author

Rudri                                                        Mehta

Rudri Mehta

Rudri is a passionate financial content writer and a Chartered Accountant by profession. She enjoys sharing knowledge through her writing skills in finance, investments, banking, and taxation while also exploring graphic designing for her own content.

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