Calculating Gross Income and Net Income

Net Income Formula

What is Net Income?

An important metric of effective management, workplace productivity and company growth, net income is the company’s total revenues earned, less any expenses such as production and operation costs for that period. Depreciation, taxes and other expenses also come under the “cost of doing business”.

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Is Net Income the same as Net Profit?

Yes and no. There can be many types of profit (and, for a company, multiple streams of “profit”) but only one of these streams is net income.

The figure net income is also used by companies to calculate earnings per share. For publicly-traded companies, net income is a kind of profit relevant to shareholders. Net income is also referred to as the bottom line.

How to Calculate Net Income?

To calculate net income for a business, you start with taking stock or account of total revenue for a given period. You can tabulate these by simply pulling together all invoices, total sales made, and sources of earned revenue.

From here, you can start to subtract all expenses, line by line or choose to subtract the sum of all expenses for the total revenue figure you previously calculated.

Net Income Formula

The net income formula, in theory, is pretty simple: it’s Total Revenues – Total Expenses = Net Income. But how one arrives – what measures one takes to account for revenues and expenses – makes this figure vulnerable to manipulation.

Net Income Formula

NET INOCME = TOTAL REVENUES – TOTAL EXPENSES

How to Find Net Income?

Depending on which financial statement you’re looking at (a tax form versus a balance sheet?), net income will be plugged in at different points. However, because net income is usually the figure you receive after subtracting all expenses from revenue, it’s usually at the bottom, leading it to be called “the bottom line”.

Now you finally know where that phrase comes from!

Example

If you’ve broadened the definition of what counts as “earned revenue” or you’re purposefully hiding expenses or neglecting to count certain items as expenses, this would inflate the number “net income” and make the business look more profitable than it actually is.

The downside to this, of course, is that while it may seem appealing to outside shareholders, it does not translate into an accurate earnings per share figure and it doesn’t make for a very reliable figure when the business wants metrics for where they should improve or how they should grow.

Knowing Net Income Formula! What to do next?

Let’s say, for example, that you’re running an online social media SaaS team. You’re lean and you’re focused on that stage of user acquisition. Soon, you’ll want to start approaching investors soon to take things to the next level and roll-out new features. So far, things have been going well, it seems, and your internal numbers for users gained per month looks healthy.

But now you want to know what that means for your “bottom line”. Which means that you want to want to get a sense of how much money you made in the last 6 months. If you operate on a subscription model, for example, how many “units” or subscriptions did you sell?

Calculate Net Income with MoneyPenny

Accounting SaaS like MoneyPenny is very different from other more traditional choices because the software is designed to act like a project management tool with a financial focus. When working within MoneyPenny, information like users per month or total invoices fulfilled translates into important figures like total revenue and total sales.

You don’t need to pop in line-by-line data entry. The software is intuitive and user-friendly. It micromanages these items so you can just select a reporting period and check off what kind of financial statement you’re looking for or what figure (such as net income) you’re calculating.

 

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The software generates reports and detailed charts that show you not only where you are now based on where you’ve been but also, where you those all-important “drop-offs” are happening.

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