How do you calculate net income?
To find net income, you start with net revenue. Next, deduct the cost of doing business, which includes materials, rent or mortgage payments, the salaries you pay your employees, utility bills and so on. That yields what is called your taxable income.
Taxes are a percentage of income, so, once you figure out what you owe in taxes, subtract that amount from your income. The remainder is your net income. Net income is found by using the following calculation:
Net Income = total revenue – (costs of goods sold + operating expenses + other gains or losses + other expenses + depreciation + interest expense + taxes)
Everything in the parenthesis of this formula makes up your total cost of doing business. To make it even clearer, let’s look at an example of net income on an annual basis.
If your annual net revenue is $120,000, your total cost of doing business is $55,000, then your net income is $120,000–$55,000, which equals $65,000.
Net income also comes into play when applying for a loan or otherwise trying to secure funding for your business. It’s used by investors or banks when determining a company’s eligibility. For shareholders, low or negative net income can mean a big drop in the value of a company’s shares.