A company's net sales and its net income both provide essential information about how much money that company is making -- but the terms refer to different aspects of the whole money-making process. Put simply, net sales is money the company gets from its customers, while net income is the money the company ultimately keeps.
Net sales, also called revenue, represent all the money a company takes in from its customers in the course of its ordinary business activities. If it's a clothing store, for instance, this is the money that comes in from selling clothing. If it's a law firm, it's the money that clients pay for legal services. Net sales is a gross figure, the total before any expenses have been paid. (The "net" in net sales refers to the fact that this figure does not include the value of returned items, allowances for damaged goods and certain discounts. Accounting standards don't consider these expenses.)
Net income is a company's profit. Also called earnings, it's what's left over after the company adds up all the money that came in, or "inflows," and subtracts all the money that went out, the "outflows." If the outflows exceed the inflows, however, there is no net income. Instead, the company has a net loss.
Inflows and Outflows
In a typical company, the bulk of inflows will be sales revenue. But inflows can also include gains from the sale of assets and investments. For example, a clothing retailer that sells off an unneeded building may realize a gain from the transaction, but that gain doesn't go into net sales because the company's business is selling clothes, not real estate. Even so, the gain becomes part of net income. Most of a company's outflows, meanwhile, are the day-to-day expenses of running the business -- the costs of obtaining or making the goods it sells, workers' wages, building maintenance, rent payments and so on. Outflows also include such things as losses from the sale of assets and investments, write-offs or write-downs of assets that have lost value, and income taxes. These all reduce net income.
A company's income statement neatly summarizes the relationship between net sales and net income. You may hear net sales referred to as "top-line" revenue, because this is literally the top line of the typical income statement. The statement then lists all the company's outflows and any additional inflows. Everything gets totaled together, and the result is net income or net loss. When companies talk about their bottom line, they're talking about the bottom line of the income statement: net income.
Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.