The Quick and Easy Guide to Calculating Your Net Income

May 01, 2020 • 3 min read
Senior business owner doing accounting work
Table of Contents

      Net income is perhaps the end-all-be-all business success metric. Everyone wants to earn money, and net income determines whether your business makes more than it spends. And if you’re a small business owner who’s personal salary is tied to the success of the business, net income’s importance just skyrocketed 10-fold. 

      This single number tells a story of efficiency and profitability (hopefully). Net income determines your business’s growth and serves as a green or red light to lenders and investors.

      Fortunately, calculating your net income is pretty straightforward.

      How to Calculate Your Net Income

      Net income = total revenue – total expenses

      Simple, right? OK, let’s break it down step-by-step.

      1. Start with your total revenue, or all the money your business made from selling its products or services.
      2. Now, begin subtracting all your business expenses (not just those relevant to the sales):
      3. And voilà—the number you’re left with is your net income!

      If that final number is positive, you made a net income. If that final number is negative, then you made a net loss—this result means you spent more than you made.

      Adjusting Your Net Income

      If your net income isn’t where you’d like it to be, you have 2 primary levers you can pull: increase revenue and decrease expenses.

      Increase Revenue

      A simple way to boost your net income is to drive up your sales. As long as each sale is making you money (more on that in a second), scaling your sales should improve your net income. However, scaling revenue usually results in additional expenses. Another option is to raise prices—here are 10 pricing strategies to make sure yours is just right.

      Decrease Expenses

      Each sale makes you money, but your associated expenses determine how much of each transaction you keep as net income. Every sale has a price: production costs, marketing expenses, sale compensation, overhead, etc. To boost your net income, you’ll need to cut your fixed costs and variable costs:

      • Fixed costs: Business expenses that are constant no matter how many products or services you produce and sell. Examples include rent, salaries, utilities, and insurance.
      • Variable costs: Business expenses that increase in proportion to production or sales. Examples include direct raw materials, price of labor, commissions, and credit card fees.

      Calculate (and Control) Your Net Income

      Take time at the end of each week, month, and quarter to evaluate your business metrics. There are plenty of numbers to look at, but net income should be at the top of your list. 

      If it’s headed in the right direction, look for ways to continue boosting sales and cutting costs. If it’s headed in the wrong direction, reevaluate your business model and see what needs fixing.

      It’s common for new businesses to suffer a net loss early on, but the goal needs to be eventual profitability. You’re in control of your net income. The financial decisions you make determine whether your business will be profitable or face a loss. Regularly calculate your net income, understand what the number means, and drive your business towards profitability.

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      About the author
      Jesse Sumrak

      Jesse Sumrak is a Social Media Manager for SendGrid, a leading digital communication platform. He's created and managed content for startups, growth-stage companies, and publicly-traded businesses. Jesse has spent almost a decade writing about small business and entrepreneurship topics, having built and sold his own post-apocalyptic fitness bootstrapped startup. When he's not dabbling in digital marketing, you'll find him ultrarunning in the Rocky Mountains of Colorado. Jesse studied Public Relations at Brigham Young University.

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