What is Net Income?

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Definition:

Net income is what’s left after you subtract all expenses from the total income of a company or individual.

🤔 Understanding net income

Net income is a type of profit. Also known as net profit or net earnings, you can calculate it by subtracting all of a company’s expenses from all of its revenues. Those expenses include everything from operating costs to overhead to taxes. Since it’s so comprehensive, net income is sometimes called the “bottom line” — It’s the ultimate measure of how a company is doing financially. Other measures of profit don’t include everything: For example, gross profit is just revenue minus the cost of producing and selling products or services.

Net income can help investors understand whether a company has funds to reinvest, cover upcoming debts, or pay dividends to stockholders. Individuals can also calculate their net incomes by taking the total they bring in from all sources and subtracting taxes and deductions.

Example

Imagine your side hustle is making handcrafted soap, and you have a booth at the local farmer’s market. Your net income from one weekend will be all of your sales minus all costs. Here’s how that breaks down:

ItemCost
Soap ingredients, molds, etc.$85
Cost of booth rental$150
Booth supplies (table, chairs, signage)$75
Licenses$35
Packaging$55
Lunch$35
Gas$10
Taxes$50
Total expenses$495
Income from soap sales$500
Tips from a soap-making demonstration$35
Total income$535

Net Income: $535 - $495 = $40

Takeaway

Net income is a bit like peeling a juicy, ripe orange for lunch…

There are parts of the orange you get to keep (and eat) and parts you remove (just like expenses take away money from your budget). Your net income is the delicious fruit that’s left over after you peel away the skin, remove the pith, and take out the seeds.

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Why does net income matter?

Net income is one of the best ways to tell how profitable a company is because it accounts for all expenses and taxes. It’s known as the bottom line because it often appears in the last row of a company’s financial statements. It’s the final word on whether or not the company made money in a certain time period.

Only looking at revenue or other measures of profit can be misleading. For example, a company could show a high volume of sales but actually be losing money every month because of how much it’s paying to lease space, make products, and advertise them. Net income can help investors understand whether a business has money left over at the end of the day to fund growth, handle unexpected costs, and pay dividends.

If a company doesn’t have any surplus funds, it might be running on a subsistence level (just enough to survive in the short term). That could indicate that the company may have trouble growing or staying afloat in the future. Relying purely on revenue or sales numbers to evaluate a company could lead to surprises later if costs are out of control.

Net income also helps investors understand what share of revenue is being eaten up by costs. This can shine a light on how much of a cushion there is between a profit and a loss should costs increase, or sales decrease, in the future. A company with a slim difference between costs and income may be more vulnerable to economic changes or other pressures. A company that has a much higher income relative to expenses may be in a stronger position to endure bumps in the economy or sales slumps.

Net income is also used to calculate EPS (earnings per share), which is net income divided by the number of outstanding shares. This is one of many tools that investors can use to compare companies and evaluate stocks.

For an individual, net income is an important part of budgeting. By knowing exactly what you bring in every month after taxes and deductions, you can figure out how much you can afford to spend and save.

What is net income vs. gross income vs. net profit?

Companies report several types of profit in financial reports and income statements. Each shows the company’s revenues minus certain costs or expenses. Again, net income is the bottom line number indicating how much a company made after subtracting all taxes and expenses. Net profit, as well as net earnings, are just other terms for net income.

For a company, gross income, also known as gross profit, is sales revenue minus the costs directly involved in producing and selling a product or service. These can include things like labor, ingredients, production costs, and transportation. Gross income helps investors evaluate how efficiently a company is making and selling their products and services. Gross income varies widely across industries, and factors like distance to market (how far products must be transported) can affect the figure. Knowing more about the company's industry and situation can help make sense of what this number really means.

For an individual, gross income is all the money you bring in before taxes and deductions. For example, it might be equivalent to your salary, interest you earn, and income from a side hustle.

How do you calculate net income?

For an individual, just take your gross income (everything you make each month) and subtract taxes and deductions. If you receive a regular paycheck, this should be pretty easy: The amount you actually get will already have things like payroll taxes and deductions withheld. If you have income from other sources, such as interest on savings accounts, you’ll need to add that in to your gross income. If you’re an independent contractor or sole proprietor, you’ll need to subtract your business expenses and taxes from the income you get.

For a business, the formula for calculating net income is:

Net income = Total revenue - Total expenses

Total revenue is money that the business brings in from all income streams, from sales to services to contracts. You can usually find this number at the top of a company’s income statements. Total expenses include the cost to produce what the business sells, the expenses of running the business (such as rent and payroll), taxes, and more.

You can typically find net income as a separate line in the financial statements that companies publish in annual and quarterly reports. For example, GoPro’s net income from the second quarter of 2019 is highlighted below:

Source: GoPro Second Quarter 2019 Results

How do I find net income on a balance sheet?

Net income appears in the three major financial reports that companies publish: the balance sheet, income statement, and cash flow statement. On the balance sheet, net income isn’t a separate line item. Instead, it’s part of the retained earnings figure, which is the amount of net income left over after the business has paid dividends to shareholders. You can’t use this to figure out net income with the information on a balance sheet — You’ll have to look at the income statement or cash flow statement.

How do I find net income on an income statement?

Because it’s the “bottom line,” net income is typically located toward the bottom of the income statement, after most other revenue and expense figures. Only things like dividends and earnings per share may be listed after net income on an income statement. For example, on Microsoft’s income statement for the first quarter of 2019, net income is listed near the bottom as $8.8B. The only entries below net income have to do with the number of company shares stockholders own and dividends paid during this period.

Source: Microsoft First Quarter 2019 Income Statement

How do I find net income on a cash flow statement?

In a cash flow statement, net income is also spelled out in a separate line item. However, instead of being at the bottom of the sheet, net income is at the top because it’s a starting point for other calculations. Looking at Microsoft’s cash flow statement for the first quarter of 2019, you can see net income as the first entry:

Source: Microsoft First Quarter 2019 Income Statement

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