In this article
You might like
No items found.
Spending made smarter
Easy-to-use cards, spend limits, approval flows, vendor payments —plus an average savings of 5%.1
|
4.8 Rating 4.8 rating
Error Message
No personal credit checks or founder guarantee.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Get fresh finance insights, monthly
Time and money-saving tips,
straight to your inbox
|
4.8 Rating 4.8 rating
Thanks for signing up
Oops! Something went wrong while submitting the form.
Table of contents

Net income is a crucial factor that all business owners must consider. It’s not just a number on a financial report, but rather the lifeblood of the business—and it can be tricky to calculate.

 

That's why we put together this comprehensive guide on how to calculate net income to help you make the most of your SMB or micro-SMB.

What is net income?

Net income is the total amount of money your business makes after deducting all expenses, allowances, and taxes. Net income gives insights into profitability, expense management, and the ability of the business to generate cash flow for reinvestment. When tracked over time, net income helps owners identify patterns or trends that could indicate potential areas for improvement and areas where business is already strong.

 

Net income is also essential in assessing the effectiveness of a business in managing expenses. Monitoring net income regularly can help owners determine whether their pricing strategy needs to be adjusted to accommodate changing costs or if certain investments are needed to increase profitability.

Steps to calculate net income

Before calculating net income, it's crucial to gather all financial data for a specific period. Without all of the data, your net income won't be entirely accurate. This includes sales numbers, expenses, payroll, taxes, and depreciation. This data is normally collected from the general ledger and should be organized into a spreadsheet. The use of accounting automation software can also simplify this process.

Once the necessary data has been collected, follow these steps to calculate your net income:

1. Determine your total revenue

Total revenue is the amount of money a business generates in a given period. The money is generated from the sale of products and services. It may also include other payments made to the business. Total revenue is also known as gross revenue.

2. Calculate and deduct total expenses

Total expenses are the costs incurred by running a business. These include administrative, marketing, and operation expenses. Examples of expenses include salaries, cost of goods, rent, advertising, and insurance premiums. For example, if a business spent $500 on salaries and $300 on office supplies in a month, the total expenses for that month would be $800. Make sure not to leave out anything, even if it's extremely small. You want your final numbers to be as accurate as possible.

3. Deduct depreciation

Depreciation is the loss of an asset value over time due to wear and tear or obsolescence. It is a non-cash expense that does not involve the physical transfer of funds. Businesses use depreciation to spread the value of an asset over its useful life. The amount of depreciation is calculated based on the asset's purchase price and estimated useful life. Depreciation is therefore deducted from revenue to determine pretax income.

4. Deduct taxes

At this stage, the amount remaining is called the pre-tax income. This is the amount of money left after all costs and depreciation have been deducted before taxes are considered. Taxes are calculated based on the business's income, and the rate of taxes varies depending on several factors. The amount of tax is then deducted from pre-tax income, leaving you with net income.

5. Calculate net income

The net income of a business is the amount left after all costs, depreciation, and taxes have been deducted. This is also known as the bottom line, the final figure that businesses use to measure their profitability. The net income of a business shows how much money a company has made or lost over a given period. By calculating your net income, you can determine the financial health of your business and make informed decisions on how to improve profitability.

Example of a net income calculation

Let's walk through how to calculate net income for a business that generated $1,000,000 in revenue. The business incurred expenses totaling $600,000, including salaries and cost of goods. Its depreciation expense was $50,000, and its tax was $150,000.

The formula we’ll use to calculate net income is the following:

Revenue – Expenses – Depreciation – Taxes = Net Income

Here’s how it applies to the example above:

  • First, subtract all expenses from the revenue ($1,000,000 - $600,000 = $400,000)
  • Next, subtract the depreciation expense to arrive at the pretax income ($400,000 - $50,000 = $350,000)
  • From the pretax income, subtract the tax as follows to arrive at the net income ($350,000 - $150,000 = $200,000)

After accounting for all expenses and taxes, the business earned a net income of $200,000.

Why is calculating net income important?

Calculating net income off an income statement is an essential accounting tool that helps businesses track revenues and expenses. It helps owners understand how much money they are making and spending.

The following are some reasons why it's important to calculate net income:

  • Identify operational costs and profits: Knowing how much money you are making or losing is key to running a successful business. Understanding net income provides insight into the financial health of your company.
  • Plan for tax season: Calculating net income is important for determining how much you will owe. This information is crucial to plan and budget appropriately to pay tax liabilities.
  • Create accurate financial statements: Calculating net income is needed to create balance sheets and income statements that accurately reflect your company’s overall financial performance.
  • Attract investors and qualify for loans: An accurate net income figure helps your business attract potential investors or qualify for loans from banks, as it provides a clear financial picture of your company.

Save your time and money today with Ramp

It's no secret that running a small or micro-sized business can be tough. Tight budgets, long hours, and constant pressure to make more profit can feel overwhelming. That's where Ramp comes in. With Ramp, you can efficiently calculate your business' net income with high accuracy and no manual effort needed. We also offer services such as expense management, accounting automation, bill payments, corporate cards, and reporting—all in one finance platform.

Contact us today to discover how Ramp can simplify your finance management.

Try Ramp for free
Error Message
No personal credit checks or founder guarantee.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Finance Writer, Ramp
Richard Moy has written extensively about procurement and vendor management topics for companies like BetterCloud, Stack Overflow, and Ramp. His writing has also appeared in The Muse, Business Insider, Fast Company, Mashable, Lifehacker, and more.
Ramp is dedicated to helping businesses of all sizes make informed decisions. We adhere to strict editorial guidelines to ensure that our content meets and maintains our high standards.

FAQs

How Dragonfly Pond Works leveled up expense management with Ramp

“Creating efficiency is an important part of an effective finance team. To scale you can’t only increase the size of the team. You have to complement with technology.”
Austin Mcilwain, CFO, Dragonfly Pond Works

How Girl Scouts of the Green & White Mountains saved 20+ hours per month with Ramp

"With the time we've saved with Ramp, we can do more of the analysis work and speed up essential processes like month-end close."
Stuart Rothberg, Finance Director, Girl Scouts, Green & White Mountains

How 8VC resolved accounting coding challenges, increased spend visibility, and cut time to close with Ramp

“With Ramp, we have complete control and governance over company-wide spend in real time...we can easily close expenses by the first week of the month versus the third or fourth week of the following month.”
Nichole Horton, Controller, 8VC

How Studs consolidated expense management, travel, and bill pay into Ramp’s single efficient platform

“Ramp Travel gives me the ability to set the controls I need, and employees the freedom and flexibility to book travel easily."
Andrew Clarke, VP Finance, Studs

How Mindbody & Classpass saved time, enhanced visibility, and improved usability with Ramp

“We were going to hold office hours, but it was so quiet that we never needed to. All the feedback was positive -- it was very easy to roll out.”
Heather Bruzus, Principal Accountant, Mindbody & Classpass

How Rarebreed Veterinary Partners prepared for scale with Ramp

“I can look in Ramp and see my spend for the month immediately. I don’t have to go on 14 different platforms. It’s all right there.”
Eric Chabot, VP of Accounting & Controller, Rarebreed Veterinary Partners

How Tomo drove efficiency and slashed time to close with Ramp

"Bringing our close timeline down by half has given us so much more time for projects and analysis.”
Eric Ho, SVP, Head of Finance, Tomo