What is Net Income

Net income is one of the multiple important metrics that offers valuable insight into a businesses’ financial health. In commerce, net income refers to how much revenue is remaining after all the expenses including wages, operating costs, salary, taxes, cost of goods and raw materials have been deducted.

For an individual, however, net income refers to the money an individual takes home after all the deductions such as health insurance, taxes and retirement contributions have been made.

So, what’s the difference between net income and gross income? While net income represents profit after subtracting all expenses, gross income is the measure of profit after only the deduction of costs of manufacturing or acquisition of the products. This includes but not limited to the cost of raw materials, inbound shipping, manufacturing and warehouse labor, production shipment among others. 

Therefore, net income is calculated using the following formulae:

Revenue – (Costs of Goods Sold + Expenses) = Net Income 

To further understand the concept of net income, let’s look at Coca-Cola. Just like all publicly traded companies in the U.S, Coca-Cola is required to regularly report its revenues and expenses to the SEC quarterly. Coca-Cola reported a $9.02 billion revenue in the first three months of 2021 which ended on April 2. Within the same time frame, the company earned $66 million and $417 million in the form of interest and equity respectively.

On the other hand, the company spent $442 million in paying interests, $2.669 billion on general and administrative expenses, 508 million on taxes, $3.505 billion on the cost of goods sold and, $124 million on other operating expenses. 

Using the formulae provided above, the company made net income of $2.255 billion. 

($9.02 billion revenue + $66 million interest + $417 equity) – ($3.505 billion cost of goods sold + 2.669 billion general and administrative expenses + $442 million interest payment + 508 million taxes + $124 million operating expenses) = $2.255 billion

As we’ve seen, net income is not just a number on a financial statement, but rather a pulse of your business or individual financial health. Whether you’re a startup or an established brand like Coca-Cola, net income will be your gauge for operational growth.

Key Points About Net Income

• Positive Net Income: A business will have a positive net income if the its revenue is more than the expenses within a given period of time.
• Negative Net Income: Conversely, a negative net income, also known as “net loss” is achieved when the net income is lower than business expenses.
• Net Income as a Measure of Good Financial Health: Ideally, net income should be greater than the expenditure for an individual or business to have good financial health.