Net income: Overview, definition, and example
What is net income?
Net income, also known as net profit or bottom line, is the amount of money a business earns after deducting all expenses, taxes, and costs from its total revenue. It represents the company's profitability over a specific period and is a key indicator of financial health.
For example, if a small business earns $100,000 in revenue but has $70,000 in expenses (including rent, salaries, and supplies), its net income would be $30,000.
Why is net income important?
Net income helps businesses assess their financial performance and sustainability. It shows how efficiently a company manages expenses and generates profit.
For SMBs, tracking net income is essential for making informed financial decisions, securing loans, attracting investors, and planning for growth. A positive net income indicates profitability, while a negative net income (net loss) signals potential financial trouble.
Understanding net income through an example
Imagine a bakery that generates $200,000 in sales over a year. After deducting ingredient costs, employee wages, rent, utilities, and taxes totaling $150,000, the bakery’s net income is $50,000. This profit can be reinvested into the business or distributed to the owner.
In another case, a tech startup earns $500,000 in revenue but incurs $550,000 in operating expenses and taxes. This results in a net loss of $50,000, signaling that the company needs to cut costs or increase sales to become profitable.
An example of a net income clause
Here’s how a net income clause might appear in a contract:
“Net income shall be calculated as total revenue minus all operating expenses, taxes, depreciation, and other applicable costs. Any distribution of net income to stakeholders shall be made in accordance with the terms outlined in this Agreement.”
Conclusion
Net income is a crucial financial metric that reflects a company’s profitability after expenses and taxes. For SMBs, monitoring net income helps guide budgeting, investment decisions, and business growth. A strong net income ensures financial stability, while a net loss may indicate the need for strategic changes. Understanding net income allows businesses to plan effectively and achieve long-term success.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.