Net Income Formula
Learn how to calculate a company’s net income.
What is Net Income?
Net income refers to the income left over after all expenses have been deducted from a business’s collected revenue. Once a business determines the net income it has collected from business operations over a period of time, the company can choose to distribute profits to shareholders through a dividend or reinvest the funds back into the company by storing the amount in its retained earnings.
For business leaders, net income is an important metric that they aim to grow year-over-year. It’s often referred to as “the bottom line” by financial experts because, in many cases, it sits at the very bottom of the income statement.
Net Income Formula
The formal calculation for net income is:
Net Income = Total Revenue – Cost of Goods Sold - Operating Expenses - Interest Expenses - Taxes
Net Income Formula Inputs:
- Revenue: Sales generated by the company and its business operations.
- Cost of Goods Sold (COGS): Costs related to producing goods or services.
- Operating Expenses: Other costs required to run the day-to-day business. Examples include selling, general, and administrative costs, research and development costs, and other operating expenses.
- Interest Expenses: Interest payments due for any outstanding company debt.
- Taxes: Relevant corporate tax charges applicable to the company.
Keep in mind that under those major line items – revenue, operating expenses, etc. – organizations will further detail different types of expenses or where the revenue is coming from. Depending on the business and the industry it operates in, the sources of revenue and operating costs will vary.
Net Income Formula Example
Assume Snowtown T-Shirt Company generated $300,000 in sales in 2023. In this same period, the company spent $50,000 in raw materials and manufacturing labor, $30,000 in office rent, and $50,000 in administrative employee wages. Additionally, the company had to pay $5,000 in interest on its outstanding loan and $10,000 in taxes.
Calculate Snowtown T-Shirt Company’s Net Income:
- Total revenue = $300,000
- Cost of goods sold expense = $50,000
- Operating expense = $30,000 + $50,000 = $80,000
- Interest expense = $5,000
- Tax expense = $10,000
- Total expenses = $145,000
- Net income = $300,000 (Revenue) - $145,000 (Expenses) = $155,000
Net Income Formula Example: Coca Cola
For any publicly-traded company, SEC filings are required. Every quarter, and of course, annually, these organizations file 10-Q and 10-K documents respectively. All of these documents can be found online through the sec.gov website or sometimes through the specific company’s website.
We’ll examine the income statement on Coca-Cola’s annual 10-K report for the fiscal year of 2022.
Each bold line is the summation of the more detailed line items that make up that metric. For instance, in this income statement, you can see:
- Net Revenues
- Gross Profit
- Operating Income
- Income Before Income Taxes
- Net Income
In 2022, Coca-Cola achieved a net income of just over $9.5 billion, which is slightly down from the $9.8 billion figure in 2021. Both figures in 2022 and 2021 have shown significantly higher net income relative to 2020 which perhaps suffered from slow growth and sales slowdowns from the pandemic.
Net Income vs. Revenue
Are revenue and net income the same thing? No, they are two different metrics with an important relationship. Revenue, which is often referred to as the “top line” of an income statement, is the sum of all money coming in before expenses are subtracted. As the calculation above shows, once operating expenses and other business expenses are deducted from revenue, you are left with the net income.
Net Income vs. Net Operating Income
These two metrics are closely linked but are slightly different. Net operating income is revenue minus all operating expenses. Net income, on the other hand, takes things a step further by subtracting all expenses from revenue, including non-operating expenses. This includes taxes, interest, and other non-operating expenses incurred by the business.
Net Income in a Business Setting
Net income is such an important metric for businesses to measure because it sets the tone for how their business is performing. For publicly-traded organizations, net income is also the basis used to determine the business’s earnings per share. Earnings per share feeds into how a business is perceived in the stock market and can play a major role in stock price fluctuations.
Net income is one way to evaluate the profitability of a business by looking at how many dollars in income can be generated with every dollar in expenses.
Other important profitability line items and metrics include:
- Gross profit: The remaining income when deducting cost of goods sold from revenue.
- Gross margin: The gross profit percentage relative to total revenue (Gross profit / Revenue)
- Operating profit: The remaining income when deducting operating expenses from revenue.
- Operating margin: The operating profit percentage relative to total revenue (Operating profit / Revenue)
- Earnings per share: The income for every outstanding share in the business (Net income / Shares outstanding)
Personal Finance Net Income
In the same way businesses use net income as a metric to track their financial performance, you can measure your personal net income to better understand your financial picture. In personal finance, net income would consist of all the money you have coming in (revenue) minus all the expenses you have going out (expenses and operating costs).
The overall general formula would be very similar:
Net Income = Revenue – Expenses
When considering your personal “revenue,” be sure to include:
- Salary or wages from your job
- Dividend payments from any investments you have
- Alimony or child support paid to you regularly
- Other sources of money coming into your bank account
On the cost side, the list can be much longer, so it might take a while to get a full picture of your costs. Example personal expenses include:
- Rent
- Utility payments
- Grocery bills
- Phone bills
- Car insurance
- Health insurance
- Streaming services
- Savings account contributions
- Retirement contributions
- Taxes
At the end of the day, personal finance and business finance aren’t all that different, and net income is a wonderful example of that. In both realms, net income is a key metric that should be monitored, measured, and improved upon when possible.
Net Income FAQ:
Q: Is net income the same as revenue?
A: No, net income is the result of subtracting all expenses from the revenue number.
Q: Where can I find a business’s net income?
A: All publicly traded businesses are required to file their financial statements with the SEC, where net income can be found on the income statement in its 10-Q or 10-K report. If the company is not publicly traded, it may be difficult for the public to access that information.
Q: What is the difference between net income and net earnings?
A: Net income and net earnings are interchangeable terms that refer to the same figure.
Additional Resources
Want to level up your accounting? Consider checking out our Financial Accounting Essentials where we teach students how to build a balance sheet, income statement, and cash flow statement from scratch based on a set of transactions. You'll also learn to find, read, and analyze the financial statements of real companies such as Microsoft and PepsiCo. Students who have taken this course have gone on to work at Barclays, Bloomberg, Goldman Sachs, EY, and many other prestigious companies. Get started now!
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