Net Income Formula
The "bottom line" — the profit left after all costs are subtracted from revenue.
What It Tells You
Net income measures how much profit a business actually earns after covering the cost of goods sold and all operating expenses. It is the single most-watched number on an income statement because it represents the true earnings available to owners and shareholders. A positive net income means the business is profitable; a negative number — a net loss — means expenses outpace revenue.
Components
- RevenueTotal income generated from selling goods or services before any costs are deducted. Also called "top line" or gross sales.
- COGSCost of Goods Sold — the direct costs tied to producing or purchasing the products that were sold (materials, direct labor, manufacturing overhead).
- ExpensesOperating expenses such as rent, salaries, utilities, marketing, insurance, and depreciation that are not directly tied to production.
Worked Example
Business with $1,000,000 revenue, $400,000 COGS, and $350,000 operating expenses
Why It Matters
Net income drives nearly every financial decision a business makes. It determines how much can be reinvested into growth, paid out as dividends, or saved as retained earnings. Investors compare net income across periods to assess whether a company is trending up or down.
Lenders also scrutinize net income when evaluating loan applications — consistent profitability signals that a business can service its debt. For small business owners, tracking net income monthly helps spot problems early, like rising costs or falling margins, before they become critical.