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.
- Start with your total revenue, or all the money your business made from selling its products or services.
- Now, begin subtracting all your business expenses (not just those relevant to the sales):
- Administrative expenses
- Office expenses (even those as tiny as the stapler)
- Legal fees
- Marketing costs (learn what is and isn’t a marketing expense)
- Licensing fees
- 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.
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.
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.