Net income is a business’s profit or loss after deducting all its operating costs. It is also known as “the bottom line,” and it’s the profit left over for owners to take home. Net income might not seem important, but it can tell how well your business is doing and what you need to grow. This article will help you understand net income and why it matters so much for entrepreneurs.
What Is Net Income?
First, you have to understand your gross income.
Gross income is the total amount of money your business brings in from sales before any deductions are made. Depending on how often the numbers are tallied up, it can be expressed as a monthly or yearly figure. For example, if a business makes $100,000 in sales for a year, its gross income is simply 100k.
Net income = Gross Income – Expenses
Once you have your gross income number for a given period (like month or year), then it’s possible to calculate net income by subtracting all relevant expenses from that amount.
Here Are Some Common Types of Costs Deducted From an Overall Figure:
Cost of goods sold: This can be referred to as “COGS.” It refers specifically to what was bought before any products were made. In other words, how much did raw materials cost?
Direct labor: How much money does your company pay employees who work directly making things? These employees are often called “manufacturing employees” or simply “employees.”
Indirect labor: If your company is involved in the service industry (meaning it doesn’t make tangible goods), you might want to deduct things like receptionists and security guards. These people may not work directly on products, but they contribute nonetheless by helping facilitate day-to-day business operations.
Administrative expenses: This refers to everything from office supplies to postage stamps that your business spends money on for administrative purposes – i.e., anything related to running a general operation rather than making/selling something specific.
Occupancy costs: How much does the place you operate out of cost per month? Remember, this includes utility bills as well.
How Can Net Income Be Used to Help a Business Grow- or Why Is It Important?
Net income can be used to determine whether or not a business needs to grow. A company might realize that its net income has gone down over time, which means expenses are rising faster than revenue for some reason.
This could mean one of two things: either the product being sold isn’t worth as much money anymore (demand is low) or something else entirely (changes in competition, economic downturns etc.). Either way, the owner will need to make changes if he wants his company’s profits and growth prospects back on track.
There are many possible strategies here – increasing marketing efforts by spending more on ads would likely increase demand; lowering costs like employee salaries/benefits may keep expenses under control; finding new customers willing to pay more for the product might help, etc.
Taking these steps will keep a company growing and remain profitable in the future- which is why net income is so important.