How to Calculate Net Income (Net Profit) for Your Small Business

Key Takeaways:

1. Net income is your true profit — not your sales.
   It’s the money left after subtracting all expenses from total revenue. Knowing this number helps you understand your business’s real financial health.
   
2. Net income = Revenue – COGS – Operating Expenses – Taxes – Interest.
   Don’t skip steps. This full formula ensures you’re capturing the true bottom line, not just surface-level profit.
   
3. Profit margins tell a deeper story.
   Use your net income to calculate your net profit margin — how much profit you earn from every dollar of sales. This shows how efficiently your business runs.
   
4. Mixing business and personal finances leads to trouble.
   Keep them separate to avoid inaccurate calculations and major headaches during tax time.
   
5. Net income is not cash flow.
   Even if you’re profitable on paper, you could still face cash shortages. Track both metrics to make smart financial decisions.
   

Net income is your total final profit, or everything left after you subtract all expenses from your revenue​. Knowing how to calculate this figure is crucial for assessing your business’s health and making informed decisions.

Net income shows you how much your business actually earns once all the bills (and taxes) are paid. This matters because a company can have high revenue and still end up with little to no profit if expenses are just as high. “Revenue is vanity, profit is sanity,” as the old saying goes – focusing on net profit helps ensure your business is truly profitable.

Let’s dig into what net income is and why it matters, walk through the formula for calculating net income, break down key components like revenue, cost of goods sold (COGS), operating expenses, and taxes, and clarify the differences between net income, gross income, and operating income.

We’ll also provide a step-by-step example to calculate net income, offer tips to avoid common mistakes, and show how net income fits into broader business financial health. By the end, you’ll be able to confidently determine your company’s net profit using an income statement or simple calculations – a critical skill for any entrepreneur aiming to grow a healthy business.

What Is Net Income and Why Does It Matter?

Net income is the profit remaining after all expenses have been deducted from your business’s revenue. Think of it as the final scorecard for your business’s financial performance over a given period. If your revenue is the “top line” of your finances, net income is the bottom line – literally the last line on your income statement showing how much money the business gets to keep​.

For example, if your company brought in $100,000 in sales and had $80,000 in total expenses, the net income would be $20,000. This $20,000 is the net profit – the amount of earnings that truly belongs to you or can be reinvested in the business.

Net income matters because it indicates your business’s profitability and overall financial health. Owners, lenders, and investors all pay close attention to net income as a gauge of performance​.

Examined over time, net income trends can signal if your business is growing, staying flat, or heading into trouble. A consistently positive net income means your business is earning more than it’s spending – a sign of viability and success.

Conversely, if expenses regularly exceed revenue (negative net income, or a net loss), it may be a warning that you need to cut costs or boost sales to sustain the business. In short, net income is a key indicator of your company’s true profitability​, beyond just the top-line sales figures.

Net income is the bottom-line profit your business keeps after all expenses – a primary measure of true business earnings.

Gross vs. Operating vs. Net Income: Understanding the Differences

It’s important not to confuse net income with other income figures that appear on a typical business income statement. Here are the key income terms and how they differ:

• Revenue (Sales): This is the total business income from all sales of products or services before any costs or expenses are deducted. It’s often called the “top line” because it’s at the top of the income statement.
  
• Gross Income (Gross Profit): Revenue minus the cost of goods sold (COGS), which are the direct costs of producing your product or delivering your service. Gross profit reflects profit from core activities after direct costs, but does not include other expenses like overhead, interest, or taxes​. It basically shows how efficiently you produce your goods or services.
  
• Operating Income: Gross profit minus operating expenses (the costs of running the business that aren’t directly tied to making the product). Operating expenses include things like rent, utilities, salaries, marketing, and other general overhead. Subtracting these from gross profit gives operating income (also called operating profit), which represents your profit from regular business operations. This figure is essentially your earnings before interest and taxes (EBIT).
  
• Net Income (Net Profit): Operating income minus any remaining expenses outside of normal operations. These typically include interest on business loans and taxes on your profits. After taking out interest and taxes, what’s left is net income – the final bottom-line profit after all expenses are accounted for.
  

In summary, gross profit only accounts for direct production costs, operating profit accounts for both direct costs and operating expenses, and net profit accounts for everything (all costs, interest, and taxes). Gross and operating profit will usually be higher than net income because they leave out some costs (for example, taxes and financing costs)​. All three measures are useful, but net income gives the most complete picture of your business’s profitability.

How to Calculate Net Income (Formula)

Calculating net income is straightforward. The simplest formula is:

In other words, net income equals all your business income minus all your business costs. “Total expenses” includes every cost of doing business – from production costs and overhead to interest and taxes​.

For example, if a freelance designer had $50,000 in project revenue and $30,000 in expenses (equipment, software, marketing, taxes, etc.), their net income would be $20,000.

Some businesses use a single-step calculation (just subtracting total expenses from revenue), while others use a multi-step approach. In a multi-step income statement, you first calculate gross profit (revenue minus COGS), then operating profit (gross profit minus operating expenses), and finally net profit (subtracting any interest and taxes from operating profit)​. Either way, you’ll end up with the same net income figure.

Net income can be positive or negative. If your revenue is greater than your expenses, you have a positive net income (a profit). If expenses exceed revenue, you end up with a negative net income, also known as a net loss​. Net income is typically calculated for a specific period of time – for example, you might determine your net profit each month, each quarter, or annually.

When expenses exceed revenue, net income will be negative – a net loss. Pay attention to net losses as a warning sign for your business.

Step-by-Step: Calculating Net Income for Your Business

To calculate your net income, you can follow these steps (which essentially build an income statement for the period):

1. Add up your total revenue. Determine all sources of income for the period (sales, service fees, etc.) and sum them up. This is your total revenue (gross income before any expenses).
   
2. Calculate cost of goods sold (COGS). Add up the direct costs of producing your goods or delivering your services. This can include materials, production labor, or other costs directly tied to sales. If you don’t sell physical products or your business has no direct cost of sales, you can skip this step.
   
3. Subtract COGS from revenue to get gross profit. Take your total revenue and subtract the COGS calculated in step 2. The result is your gross profit (or gross income). This represents your profit after direct production costs.
   
4. List all operating expenses and total them. Gather all other expenses needed to run your business (besides COGS). This includes rent, utilities, salaries, office supplies, marketing, insurance, and any other overhead. Sum all these operating expenses.
   
5. Subtract operating expenses from gross profit. Take your gross profit from step 3 and subtract the total operating expenses from step 4. This gives you operating income – your profit from normal business operations before interest and taxes.
   
6. Subtract any non-operating expenses. Deduct any additional expenses not yet accounted for, such as interest on business loans or one-time charges. (If you have other income like interest earned or asset sales, add those in as well.)
   
7. Subtract taxes to get net income. Finally, subtract any income taxes the business owes for the period. The remainder after taxes is your net income. (Note: If your business is a sole proprietorship or pass-through entity where business profit is taxed on your personal return, you might not subtract income tax on the business statement itself. In that case, the figure before personal taxes is still your net profit for the business.)*
   

After completing these steps, you’ll have your net income for the period – the money left over after all expenses. Double-check your calculations to ensure no expense or cost is missed, as that would affect the accuracy of your net profit figure.

Example: Net Income Calculation in Action

Let’s walk through a real-world example to see how these pieces come together. Imagine Lisa owns a small candle-making business. In the last quarter, her business had the following figures:

• Total revenue: $50,000 (sales of candles and related products)
  
• Cost of goods sold: $15,000 (wax, wicks, containers, fragrances, and other direct production costs)
  
• Rent: $5,000
  
• Utilities: $2,000
  
• Employee wages: $10,000
  
• Marketing and advertising: $1,000
  
• Interest on loan: $500

Now, let’s calculate Lisa’s net income step by step:

1. Gross profit: Subtract COGS from total revenue.
Revenue ($50,000) – COGS ($15,000) = $35,000 gross profit. This means after the direct costs of making her candles, Lisa has $35,000 left from her sales.

2. Operating income: Subtract operating expenses (rent, utilities, wages, marketing) from gross profit. First, sum up those operating expenses: $5,000 + $2,000 + $10,000 + $1,000 = $18,000 total operating expenses. Now subtract that from gross profit: $35,000 – $18,000 = $17,000 operating income. This is Lisa’s profit from running her shop, before interest and taxes.

3. Net income: Subtract the remaining expenses (in this case, the $500 interest on her loan) from operating income. $17,000 – $500 = $16,500 net income. This is Lisa’s profit for the quarter after all expenses are accounted for. If Lisa’s business were structured as a corporation, she would also subtract any taxes owed to get net income after tax. Since Lisa is a small owner-operated business (and will pay income tax on this profit personally), $16,500 represents her net profit for the quarter.

Lisa can now see that her business earned $16,500 in profit during the quarter. She can compare this net income to prior periods to gauge growth, or use it to calculate her net profit margin (percentage of revenue that was profit). In this case, her net profit margin would be $16,500 / $50,000 = 33%, meaning 33¢ of every dollar of revenue was kept as profit. This example illustrates how each step in the calculation builds up to the final net income figure.

Common Mistakes to Avoid When Calculating Net Income

When determining your net income, be mindful of some frequent pitfalls that can lead to incorrect calculations or misunderstandings:

• Confusing revenue (or gross income) with net income: One of the most common mistakes is to assume that if your business brought in $100,000 in sales, you made $100,000 in profit. Remember that revenue is not profit. You must subtract all expenses to get net income. Likewise, don’t confuse gross profit (which excludes only COGS) with net profit (which accounts for every expense)​. Always differentiate between top-line sales, intermediate profit figures, and bottom-line net income.
  
• Forgetting to include all expenses: Small or infrequent expenses can be easy to overlook, but they add up. Failing to record things like business subscriptions, office supplies, mileage, or other miscellaneous costs will overstate your net income​. Ensure you include every expense – even minor ones – when tallying up costs, so that your net income calculation is accurate.
  
• Mixing personal and business finances: It’s a mistake to combine personal expenses with business expenses in your accounting. For example, if you pay for personal items from your business account (or vice versa), it becomes tricky to figure out true business costs and profit. This can lead to incorrect net income calculations and headaches at tax time​. Always separate business finances from personal finances to keep your books clean.
  
• Ignoring non-cash or periodic expenses: Some expenses don’t involve an immediate cash payment but still affect your profit. For instance, depreciation (spreading out the cost of equipment over its useful life) should be counted in expenses – forgetting it can make profits look higher than they really are​. Similarly, account for any annual or one-time costs (like insurance premiums or equipment purchases) by allocating them to the period they benefit. Overlooking these can distort your net income.
  
• Not considering taxes in planning: If your calculation of net income ignores income taxes, you might think you have more profit available than you truly do. Make sure to use the correct tax rates and set aside money for taxes on your profit​. For example, if you have a 20% tax rate, a $10,000 pre-tax profit will net you only $8,000 after taxes. Using the wrong tax assumptions can lead to unpleasant surprises and cash shortfalls.
  
• Equating net income with cash flow: Net income is not the same as cash in the bank. Your income statement might show a profit, but if your customers haven’t paid you yet (accounts receivable) or you purchased a lot of inventory, your actual cash on hand could be much lower. Likewise, you might have positive cash flow by delaying payments, but that doesn’t mean you’re truly profitable. Don’t mistake net profit for cash flow – both are important, but they measure different things​.
  

Remember: Revenue is not the same as profit – net income is what truly matters for your business’s bottom line.

Net Income and Your Business’s Financial Health

Net income is not just an accounting number – it’s a measure of your business’s financial health. A healthy net profit allows you to invest back into the business (buy new equipment, hire staff, increase marketing), pay down debts, or take home earnings as the owner. Tracking net income over time lets you spot trends: for example, growing net income each year is a positive sign, whereas a declining or negative net income should prompt a closer look at your expenses and revenue streams.

It’s also useful to look at your net profit margin – that is, net income divided by revenue, expressed as a percentage. This tells you what portion of each dollar of revenue is profit. For instance, a 10% net profit margin means 10¢ of every $1 earned is kept as profit. Comparing profit margins over time or against industry averages can help you understand your business’s efficiency. If your net margin is lower than peers, you may need to find ways to cut costs or increase prices.

Net profit margin tells you how many cents of profit you earn from each dollar of sales – a critical measure of efficiency.

Lenders and investors often consider net income when evaluating your business. A solid history of profits (and decent profit margins) signals that your company is viable and well-managed​. On the other hand, continual losses can make it difficult to obtain financing or attract investment. From a financial planning perspective, knowing your net income helps in budgeting and forecasting – you can set more realistic goals for growth when you understand how much earnings you actually retain after expenses.

Finally, remember that net income is one piece of the puzzle. It works together with other metrics: cash flow (to ensure you have liquidity to operate), revenue growth (to see if your sales base is expanding), and operational efficiency (how well you control costs). A company with strong net income, positive cash flow, and steady revenue growth is generally in excellent financial shape. Net income specifically provides the bottom-line insight into whether the business model is working – if you’re consistently turning a profit, you’re on the right track toward long-term success.

Practical Tips for Tracking and Improving Net Income

Staying on top of your net income requires consistent tracking and savvy management. Here are some practical tips:

• Use tools or templates to track finances: Maintain a profit and loss statement (income statement) for each month. You can use accounting software or a simple spreadsheet. Many small business resources offer free downloadable income statement templates or checklists that you can use to record all revenues and expenses. Using a template ensures you include every category and helps standardize your process.
  
• Review your numbers regularly: Don’t wait until tax time to calculate net income. Set aside time monthly or quarterly to review your income and expenses. Regular check-ins let you catch any unusual spikes in costs or drops in revenue. By monitoring your net income trend, you can make timely adjustments (for example, cutting an unnecessary expense if profits are shrinking).
  
• Find ways to increase profit margins: Look for opportunities to boost your net profit either by increasing revenue or reducing expenses (or both). For instance, you might invest in marketing to drive more sales, adjust your pricing strategy, or expand into new markets. On the cost side, try to identify wasteful spending – could you negotiate better rates with suppliers, reduce utility usage, or find a more cost-effective way to produce your product? Even small savings can improve your bottom line.
  
• Plan for taxes and savings: Since a portion of your net income may need to go toward taxes, factor that into your planning. Setting aside money for tax payments (or making quarterly estimated tax payments) can prevent a nasty surprise at year-end. If you have a good profit year, consider reserving some earnings as a cushion or reinvesting in the business’s growth.
  
• Consult professionals if needed: If you’re unsure about your financial calculations or want advice on improving profitability, don’t hesitate to consult a bookkeeper or accountant. They can help set up your statements correctly and offer insights into how to maximize your earnings and keep your business finances healthy.
  

By diligently tracking your income and expenses and taking proactive steps to manage them, you’ll gain greater control over your business’s net income. In turn, that means more informed decision-making and a more financially resilient company.

Keep a close eye on your net income by tracking it regularly – knowing your numbers helps you make smarter business decisions.

The Bottom Line Measure

Net income, or net profit, is the bottom-line measure of your small business’s success. It shows you exactly how much money you’re earning after covering all costs. Understanding and calculating net income empowers you to answer critical questions: Is my business truly profitable?

Where are my earnings going? By breaking down revenue and expenses and keeping good records, you can pinpoint what drives your profits or losses.

The good news is that calculating net income isn’t rocket science – it’s a straightforward formula once you have your financial information organized. With the knowledge from this guide, you can confidently determine your net income and use that insight to guide your business decisions. Keep an eye on that bottom line, make adjustments as needed, and you’ll be well on your way to improved business income and long-term financial success.