What is a Business’s Net Income?
Small business owners have a lot to think about, but one of the biggest is their bottom line.
What’s the bottom line? It’s the net income – or profit – a business makes over a given period of time after deducting all its expenses. At its simplest, net income can be described as Total Revenue minus Total Expenses.
But it’s actually more complicated than that because a business will need to know other things, including its Gross Income, which is its Sales Revenue minus the Cost of Goods Sold, or COGS. What is revenue and COGS?
Think of it this way, gross revenue is the total of all sales over a period of time. From that a business will deduct its COGS, which can be the cost of purchasing and repackaging or storing the goods they sell, or costs to manufacture their products. But it’s not the bottom line yet.
To get that, we’ll extend the formula a bit, where Net Income equals Revenue minus Cost of Goods Sold minus Expenses.
So what expenses are we talking about? These are things such as utilities, payroll, rent, interest expenses, depreciation and advertising.
Once all expenses are deducted, a business will have its Net Income. This number is the bottom line.
While the formulas for figuring these numbers can be pretty straightforward, the intricacies are not. To make sure you are factoring all revenue and expenses correctly, experts recommend that you work closely with your accountant.
Bottom line: Your bottom line – and how you get to it – matters.