There’s nothing like realizing your business made a profit. You put a lot of time and energy into making that happen. So you may be a little disappointed when you look at the final number on your profit and loss statement and see you made less income for the month than you anticipated. That is because you can’t just look at pure income when tabulating how your business is doing. You need to look at the net income, which takes your business's expenses into account.
What Does Net Income Mean?
Net income is the best way to measure how your business is faring financially. It takes your total earnings and sales and deducts taxes, overhead, depreciation and other business expenses. Deductions include:
- Administrative expenses
- Cost of production
- Salaries and benefits
- Marketing costs
- Income taxes
- Depreciation and amortization
What remains is your net income, also known as net profit, net earnings or net income after taxes.
When you’re looking at monthly or annual income statements, net income is reflected in the last line. This is also known as “the bottom line.”
How Do You Calculate Net Income After Taxes?
To calculate your net income after taxes, you must have access to all of your earnings and expenses for the month. The best way to do this is to keep track in a spreadsheet or through business-expense tracking software.
Net income is calculated by subtracting your total expenses from your total revenue. For example, if you earned $50,000 last month and had $30,000 in operating expenses and $10,000 in taxes, your net income after taxes is $10,000.
What Is the Net Income Loss?
Your business may not always be profitable. When that happens, the number you see on your profit and loss statement is a net income loss. That means your expenses were more than your total earnings for the time period. Net losses can be caused by expenses and production costs that are too high and low revenues due to lack of marketing, pricing your goods or services too low or increased competition in the market.
For example, if you earned $50,000 last month and had $60,000 in operating expenses and $5,000 in taxes, your net income loss is $15,000. You should not regularly have a net income loss, as it can cause your company to go bankrupt. In the short-term, you may have an off-month that you can cover with retained earnings or loans.
Keeping track of your monthly profits and losses is important so that you can see how your business is doing in the short-term. Your annual income statement will give you a big picture of what needs to be adjusted for long-term success.