How To Calculate Net Income (With Examples and Tips)

Net income is the total amount of money your business earned in a period of time, minus all of its business expenses, taxes, and interest. It measures your company’s profitability. You can learn more in our guide on net income meaning. For now, we’ll get right into how to calculate net income using the net income formula.

Net income is your company’s total profits after deducting all business expenses. Some people refer to net income as net earnings, net profit, or simply your “bottom line” (nicknamed from its location at the bottom of the income statement). It’s the amount of money you have left to pay shareholders, invest in new projects or equipment, pay off debts, or save for future use.

The first part of the formula, revenue minus cost of goods sold, is also the formula for gross income. (Check out our simple guide for how to calculate cost of goods sold).

Or, if you really want to simplify things, you can express the net income formula as:

Net income can be positive or negative. When your company has more revenues than expenses, you have a positive net income. If your total expenses are more than your revenues, you have a negative net income, also known as a net loss.

Using the formula above, you can find your company’s net income for any given period: annual, quarterly, or monthly—whichever timeframe works for your business.

The general formula for net income could be expressed as: Net Income = Total Revenue — Total Expenses.

Net Income Formula (Example) | How to Calculate Net Income?

How is net income used?

Net income is an important metric for determining a company’s financial health and overall value. A company can also use the net income formula to take advantage of various tax options. As a higher net income leads to higher taxes, a company may spend more money before the end of the fiscal year with the purpose of reducing its net income and the amount of taxes it will owe.

Net income is also an important metric for third parties, such as creditors and potential investors. Creditors are interesting in knowing if a company has enough income to pay off debts, and investors look for companies with earning potential and efficient management that can keep expenses down.

What is the net income formula?

The formula for net income is:

Total revenues – Total expenses = Net income

Potential expenses can be taxes, cost of goods sold, operating expenses, loan interest, depreciation cost and administrative expenses. The net income formula basically calculates how much money is left after all these expenses are paid. That amount can be used in various ways, such as investing in new technology, paying off debt, keeping it for future unforeseen expenses and distributing it among partners or shareholders.

Examples

Here are some examples of how to calculate net income:

Example 1

A windshield wiper manufacturing company generates $340,000 of total revenue each year from manufacturing and selling windshield wipers and renting out some of its properties. It spends $90,000 on prime materials, $75,000 on equipment rentals, $110,000 on staff wages, $9,000 on utilities and $30,000 on taxes. Its net income is the total revenue minus expenses, meaning:

340,000 – (90,000 + 75,000 + 110,000 + 9,000 + 30,000) = $26,000

Example 2

A financial consulting company generated $210,000 of revenue last year from offering consultancy services to its clients. They also had to spend $89,000 on staff wages and bonuses, $20,000 on rent, $5,000 on utilities and $10,000 on taxes. Heres how it would find the net income:

210,000 – (89,000 + 20,000 + 5,000 + 10,000) = $86,000

Example 3

A small clothing manufacturing company has total revenues of $70,000. Their expenses over the same time period are:

Its net income for the selected time period is:

70,000 – (19,000 + 13,000 + 25,000 + 2,000 + 5,000) = $6,000

How to use the net income formula

Consider these steps when using the net income formula:

1. Calculate your total revenue

Your companys total revenue is the total income that it generates through the sale of its products. To calculate your total revenue, first determine how many units of each good or service were sold within a certain time period and their individual prices. You can then find out what the total revenue is by multiplying the number of sold units by the average price per sold unit.

2. Calculate your total expenses

After determining how much money your organization produces within a certain period of time, add up all expenses within the same time frame. All costs of operations required to generate the revenue are considered company expenses. There are two main types of expenses:

3. Use the net income formula

After determining the total revenue and expenses, you can calculate net income by using the following formula:
(Net income = Total revenue – Total expenses)

Start by writing down the organizations total revenue and subtract all expenses and costs from that number, including taxes. The resulting number is your companys net income over the selected time period.

When to use the net income formula

The net income formula is typically used in any of these situations:

Tips for calculating net income in Excel

Follow these tips for calculating net income in Excel:

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