How To Calculate Net Income: Formula & Examples

Part of being a successful business owner includes knowing how to measure the financial performance of your business. Without this critical skill, you wouldn’t be able to take corrective action when needed. You also wouldn’t have an accurate picture of how much spending power you have.

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Today we will discuss net income, which measures how much income you’ve generated after accounting for all costs. Keep reading to learn how to calculate net income and use the specific formula used by real estate investors.

What Is Net Income?

Net income is used by investors, entrepreneurs, and businesses to understand how much revenue exceeds expenses. Individuals can also use net income to analyze how much income they have left over after paying expenses.

Net income, or net earnings, is an important measure of profitability. The number is calculated using an easy formula, which can be used for any time period.

Net Income Formula

Put simply, net income represents profits left over after paying all expenses. There are a few different iterations of the formula. Each version is derived from the same concept but is adapted to a specific scenario.

For example here is a version that can be used to track your personal income and expenses:

Net Income = Gross Income – Expenses

The same formula takes on a slight variation if you want to calculate net income for your business:

Net Income = Total Revenues – Total Expenses

Finally, the formula can be expanded upon to accommodate different accounting methods:

Net Income = Total Revenue – Cost of Goods Sold – Total Expenses

Note that your net income can be a positive or negative number. If your business revenue exceeds expenses, your net income will be positive. Obtaining a high positive net income is the goal. This can be done by increasing revenue, minimizing expenses, or both.

How To Calculate Net Income For A Business

The net income formula can be used to get a financial snapshot of any given period, such as monthly, quarterly, or annually.

Let’s use an example to demonstrate how to calculate net income for a business. Real Estate Investor, LLC generated an annual revenue of $200,000 from January 1 to December 31, 2021. During this period, they paid $42,000 in taxes. The LLC also spent $60,000 in operating expenses, including property repairs, marketing, and general administration.

Using the simple formula for business, the net income calculation would like this:

Net Income = Total Revenues – Total Expenses

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