What is Net Income and How to Calculate It?

When you hear the term net income, what’s the first thing that comes to mind? For many people, it’s simply “profit.” And they’re not wrong. But net income is more than just a number at the bottom of a financial statement-it’s the scorecard that tells you how well a business (or even an individual) is really doing financially.

So, let’s break it down in plain English.

What is Net Income?

Net income, often called the “bottom line,” is the amount of money left after you subtract all expenses from total revenue. It’s what’s left after paying for rent, salaries, taxes, interest, and every other cost of running the business.

Think of it like your monthly paycheck. The salary you see in your job offer letter is your gross income. But after taxes, health insurance deductions, and retirement contributions are taken out, what hits your bank account is your net income. That’s the money you actually get to use.

For businesses, net income works the same way. It shows how much profit is left after covering all costs.

Why Does Net Income Matter?

You’ve probably heard the saying, “Revenue is vanity, profit is sanity, but cash is reality.” Net income is where the “sanity” part comes in.

A company can brag about millions in revenue, but if expenses are out of control, the net income will tell the truth. Investors, business owners, and even lenders pay close attention to net income because it shows whether a company is really profitable or just surviving on sales hype.

How to Calculate Net Income?

Here’s the simple formula:

Net Income = Total Revenue – Total Expenses

That’s it. But let’s put some real-world context around it.

Example:

Imagine you run a small bakery. In one month:

• You make $20,000 in sales (that’s your revenue).

• Your expenses look like this:

  • Rent: $3,000

  • Ingredients: $5,000

  • Staff wages: $6,000

  • Utilities: $1,000

  • Taxes & other expenses: $2,000

Your total expenses = $17,000.

Now, plug that into the formula:
Net Income = $20,000 – $17,000 = $3,000

So, your bakery’s net income for the month is $3,000. That’s your profit after paying all bills.

Net Income vs. Gross Income

Here’s a common mix-up: gross income vs. net income.

• Gross income is the total earnings before expenses.

• Net income is what remains after all expenses.

Back to our bakery example-your $20,000 in sales is gross income, and the $3,000 leftover is net income.

Key Insights About Net Income

• A positive net income means the business is profitable.

• A negative net income (often called a net loss) means expenses are greater than revenue.

• Investors often use net income as a starting point to calculate other ratios like earnings per share (EPS).

Conclusion

Net income is more than just a financial figure-it’s the clearest indicator of profitability. Whether you’re managing a household budget, running a small business, or analyzing a corporation, knowing how to calculate net income helps you understand the true financial picture.

So the next time you hear a company celebrating its big revenue numbers, ask yourself: “Yes, but what’s their net income?” Because that’s the number that really counts.