Calc

How to Calculate Net Income (With Examples)

By | Last update: 28 October 2019

Net income, also called net profit, is calculated by deducting an organisation's total expenses from their total revenue. It's basically the spare money left over at the end of a financial year, and a business might use it to invest, expand, save, or give out to shareholders.

What is net income?

A company's net income is what remains of its revenue (or takings) once all expenses have been accounted for. Imagine a net trawling a bank account, and all the money for costs (such as rent, electricity, wages, insurance, marketing etc.) slipping through the holes. What's left in the net afterwards is the net income, or net profit.

Net income is an important figure when valuing a business or assessing the cost-effectiveness of an organisation. Looking at revenue alone - such as ticket sales in a theater - could be misleading; if revenue is very high, then on face-value, it might look like a prospering business. However, if the outgoing costs are just as high (an expensive building requiring too much maintenance, perhaps), then the business is not as successful as it might seem. It's therefore more meaningful to take the costs away from the revenue to work out the net income.

Net income formula

Net income = total revenue - total expenses

How to calculate net income

Calculating net income is straightforward. It just requires two figures: the total revenue and the total expenses.

Total revenue means the combined amount of money taken for the sale of goods or services. McDonalds' revenue comes from food sales, Netflix's revenue comes from subscription fees, and Wanda's Wonderful Windows gets its revenue from the money that people pay Wanda to wash their windows.

A company's expenses comprise all the different costs involved in running a business. From secretaries to staplers, web designers to water supplies, laptops to line-managers, you need to add together all the costs to work out your total expenses.

Once you've got these numbers, you slot them into the formula. In short, take the total revenue and subtract the total expenses from it to work out the net income.

Calculating net income with calculator

Calculating net income: examples

Simone's Noodle Bar has had a good couple of years. Here's how her accounting book looks:


2018 financial year

Revenue (sales) $80,000

  • Rent: $15,000
  • Utilities: $2000
  • Maintenance: $1500
  • Business insurance: $3000
  • Simone's wages: $30,000
  • Ingredients: $6,000
  • Website upkeep: $1000

TOTAL EXPENSES = $58,500

Net income = total revenue - total expenses

Net income = $80,000 - $58,500

Net income = $21,500

2019 financial year

Revenue (sales) $96,000

  • Rent: $18,000
  • Utilities: $2500
  • Maintenance: $1500
  • Business insurance: $3000
  • Simone's wages: $35,000
  • Ingredients: $10,000
  • Website upkeep: $1000

TOTAL EXPENSES = $71,000

Net income = total revenue - total expenses

Net income = $96,000 - $71,000

Net income = $25,000

By working out her net income, Simone is able to see that in spite of a rent increase in 2019, she made enough sales to increase her net profit from the previous year. Woohoo! Using her net income and sales figures, she can now go on to work out her profit margin.

Handy, right? Here's another.

Gareth's bike repair service

Gareth has just started a bike repair service and is trying to work out whether he has any money to hire an assistant next year. Let's check out his books...

Bike repair example for financials

Revenue $62,000

  • Rent: $9,000
  • Utilities: $1200
  • Equipment: $6,000
  • Business insurance: $4000
  • Gareth's wages: $38,000
  • Marketing: $2000

TOTAL EXPENSES = $60,200

Net income = total revenue - total expenses

Net income = $62,000 - $60,200

Net income = $1800

Well it doesn't look like Gareth can afford that assistant just yet, in spite of the healthy-looking $62,000 revenue. Lucky he worked out his net income before committing to that! If he looks at his outgoings for this first year though, there is hope: he had an initial outlay of $6000 on mechanical equipment, which he shouldn't need to spend again this year (and hopefully the $2k on marketing will boost next year's revenue, too!)

So, there you have it. Net income: it all comes down to the bottom line.

Psst! Don't mess about with your profits: use our trusty margin calculator for calculating net margin.


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