Longing to know how to figure out your net business income? Here are some tips and strategies in 2020 you can apply. Here we go!
In today’s world, most people have less understanding of what net income is all about even if it is one of the simplest concepts in economics. So, first and foremost you need the knowledge of Net business income and have a good understanding of it. After that, you can go ahead and figure out what your net income should look like in the long run. That being said, you would be able to have a full understanding of the concept of net income and also be able to keep track of your finances as well as your financial growth.
The Concept: Net Income
Net income can be seen as one of the basic items found in an income statement. Net income in general terms is what most businesses use in calculating their earnings as well as their profits. This is why often, Net income can be used interchangeably with net earnings or net profit.
It is a very important concept for business owners who could make use of it in keeping track of their business income as well as their profit level. They could do this regularly to ensure that they are still right on track. You understand better how net income plays a role in measuring revenue that ensures the successful run of the business.
How To Calculate Your Net Business Income
You can calculate your net income by subtracting the cost of all your goods, all expenses (ranging from administrative expenses to all operating expenses as well as your taxes, payroll costs, utility bills, or even dividends) from your sales. That is to say that you can get your Net business income by calculating based on your total revenue.
Revenue simply means the exact amount of money a company makes for themselves after some time. This could include cash or checks or any other form of payment for the goods bought and services rendered. You can not just know about your revenue alone without having a little knowledge about your growth and results. This is where finding your net income comes in.
Once you have the amount of your total revenue, you subtract all expenses incurred from the business including taxes paid and interests and so what is left is your net income. The net income can be gotten using this formula: Total revenues – Total expenses = Net income
To help in understanding a lot better how you can get your net income amount, the example below would help you understand it more.
For instance, if your business total revenue is $600,000 and all business expenses which might include operating expenses at ($100,000), taxes ($40,000), utility bills ($2,000), and rent ($6000). Your total expenses at that time is equal to $148,000. Therefore, your net income is $600,000 – $148,000 = $452,000
Why Should Businesses Calculate Their Net Income?
The formula above allows several businesses to find their net income either quarterly or annually depending on the time frame that works for them to keep check of their health as well as wealth that is their stability and growth.
It is required for business owners to ensure that they calculate their net business income to know if the net profit margin is on the right track and also create new measures on how to generate more revenues.
Most investors make use of net income to evaluate the amount of revenue generated by the organization as this appears on the organization’s income statement. They become aware of the profitability level of the organization. Whether to invest in or not, because most times, organizations can inflate their revenue just to draw in investors.
As an investor in any organization, it is required of you to review the numbers used in calculating the company’s net income to ascertain if the revenue exceeds the expenses of that organization or the results were just manipulated figures.
With this in mind, net income can either be positive or negative, you will be able to tell when the net income is positive if the company has fewer expenses but more revenues. But, when the total expenses are much more than the total revenues, then you have what is called a negative net income which can also be seen as a net loss.
Calculating net income is also important for an individual as this allows you to know how much more you can invest, how much you can save away, or when to increase your saving rate as well as when to put in a more detailed look into your retirement plan.
The Concept: Personal Net Income
Net income in personal finance can be seen as the amount of money an individual goes home with after all deductions like taxes have been removed from the gross income. When I say gross income, I mean the exact amount of money you are paid before any form of deductions are made.
Understanding The Difference Between Gross Income And Net Income
To find your business net income requires you to have knowledge about your business gross income as well as expenses at that time.
Most times people get confused in differentiating between these two concepts as both have to deal with the total revenue of your business. That been said, net income is the amount of money your business makes after all deductions have been made and expenses paid. Net income also entails how much profit a business is taking home at the end of the day. This can be determined by subtracting all business costs from the business’s total revenue. This makes net income lower in amount than gross income. So, gross income doesn’t include expenses.
Gross income is how much your business has before you deduct any expenses. It is used in getting your net income too. Gross income explains how much money your business has left when you deduct the cost of goods sold from total revenue.
The formula is: Total revenue – Cost of goods sold = gross income
The formula above creates a vivid picture of how you can calculate your business gross income in a simple less complicated manner. Therefore, when calculating either your net income or gross income, it is important to know the actual number and you can use either an accounting software program like Intact or QuickBooks or a good accountant that handles bookkeeping excellently.
As your business grows with time, the numbers will improve as well and more investors will keep trooping in including shareholders and partners, so it is of great importance to know these, so you can boldly show your investors and shareholders that indeed you are on top of your game.
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