General information for small business owners, not tax or accounting advice. How income tax applies to your business depends on how it’s set up, so check with your accountant or tax preparer.
What is net income? It’s the money your business has left after subtracting every cost from your revenue for a period: the cost of the goods you sold, your operating expenses, interest and taxes. It’s the last line of a profit and loss statement, which is why people call it the bottom line.
It’s the clearest single answer to “did the business make money this year?” It is not, as many owners find out, the same as the money sitting in your bank account. Both points are covered below.
What is net income, in plain terms
Everything your customers paid you, minus everything it cost to run the business, equals net income. If the costs are bigger than the revenue, the result is negative and is called a net loss.
Net income is measured over a period: a month, a quarter, a year. It shows how the business performed during that time, not what it owns on a given day.
The net income formula
The short version:
Net income = total revenue − total expenses
The longer version shows the steps most small businesses go through:
Net income = net sales − cost of goods sold − operating expenses − interest − taxes
Both give the same answer. The longer one is more useful because it shows where the money went. If you want to see how those lines are laid out on a full statement, with a blank template to fill in, see our profit and loss statement guide.
A worked net income example
Take a potter who sells mugs, bowls and planters at weekend craft fairs and a few holiday markets. Here’s her year:
| Line | Amount |
|---|---|
| Net sales | $48,000 |
| Cost of goods sold (clay, glaze, kiln firing, packaging) | −$16,800 |
| Gross profit | $31,200 |
| Booth and event fees | −$6,400 |
| Travel and lodging for events | −$3,100 |
| Card processing fees | −$1,400 |
| Bags, wrapping and display supplies | −$1,200 |
| Website and software | −$900 |
| Insurance | −$600 |
| Other | −$1,000 |
| Operating income | $16,600 |
| Interest on a kiln loan | −$200 |
| Net income (before her personal income tax) | $16,400 |
Her net income for the year is $16,400. Divide it by net sales and you get a net profit margin of about 34%: she kept 34 cents of every sales dollar after all business costs.
Why “before her personal income tax”? For a sole proprietor, the business generally doesn’t pay income tax on its own; its profit is reported on the owner’s personal return. A corporation pays its own income tax, and that tax appears as a line above net income. Your structure decides which applies, which is a question for your tax preparer.
Net income vs net profit
For a small business these are the same thing. “Net profit,” “net earnings” and “the bottom line” all mean the revenue left after every expense. Accountants tend to write net income; owners tend to say net profit.
A few terms that sound similar but are not net income:
- Net sales is revenue after discounts and refunds. It’s the top line, not the bottom one. Our gross vs net guide covers the difference.
- Gross profit is net sales minus cost of goods sold, before rent, wages and other overhead.
- Operating income is profit from normal selling, before interest and taxes.
- Revenue is simply what you sold. A big revenue number can come with a small net income; see revenue vs profit.
Net income vs cash in the bank
The potter earned $16,400 in net income. But her business bank balance only went up by $4,000 over the year. Nothing is missing. The difference is spending that doesn’t show up as an expense on the P&L:
| Item | Amount |
|---|---|
| Net income | $16,400 |
| Built up more finished stock for next season | −$3,000 |
| Paid down the kiln loan (principal, not interest) | −$2,400 |
| Bought a new canopy and display shelving | −$1,800 |
| Owner draws (paid herself) | −$5,200 |
| Increase in the bank balance | $4,000 |
Each line is a common reason net income and cash part ways:
- Inventory. Stock you bought but haven’t sold yet is cash spent, but it only becomes an expense (cost of goods sold) when it sells.
- Loan principal. Only the interest is an expense. Repaying the amount you borrowed reduces your debt, not your net income.
- Equipment. Bigger purchases are usually spread over several years as depreciation rather than expensed all at once. In this simple example we’ve left that out; your accountant will handle it properly.
- Owner draws. Money a sole proprietor takes out for themselves generally isn’t a business expense, so it doesn’t reduce net income, but it does leave the account.
- Timing. On an accrual basis, a sale counts when it’s made even if you’re paid next month, and a bill counts when it’s owed even if you pay it later.
This gap is why a business can show healthy net income and still struggle to pay a bill in March. Planning for it is the subject of our guide to cash flow for small businesses.
Look at net income by month, not just by year
A yearly figure hides the shape of a seasonal business. The potter’s $16,400 didn’t arrive evenly. Her November and December markets might produce most of it, while January and February show a net loss: insurance, software and loan interest still get paid, but there are no fairs.
That’s normal, and it’s useful to see. Monthly net income shows:
- which months carry the business, so you protect them with stock and staff,
- how deep the off-season loss runs, so you know what the busy months need to cover,
- whether a new event or product actually added to the bottom line, or just added work.
Compare each month with the same month last year rather than with the month before. December against December tells you far more than December against January.
Net income when someone asks about your income
Outside the business, “net income” is also used loosely to mean personal take-home pay: what lands in an employee’s account after taxes and withholdings. If a landlord or lender asks for your net income, check whether they mean your business’s bottom line or your personal after-tax income. They’re different numbers.
How to raise net income
Every line above net income is a lever. For a small seller the practical ones are:
- Raise prices on items with thin margins. A $2 increase on a $28 mug can matter more than selling ten extra mugs.
- Cut the cost of goods. Buy materials in larger lots when cash allows, and reduce waste and breakage.
- Drop the events that don’t pay. Compare each event’s sales with its fees, travel and your time.
- Sell more of what earns most. Put high-margin items at the front of the table and pair them with best sellers.
- Watch discounts. A standing 10% off quietly comes straight out of net income.
Measure each change month to month. The percent change calculator makes it quick to see whether net income moved as much as you hoped.
Where SleepingFire helps
SleepingFire doesn’t calculate net income; it’s point-of-sale and inventory software, not accounting software. It does give you the numbers net income is built from: net sales, discounts and refunds for any date range, profit margin per product, a sales tax summary to keep tax out of revenue, and inventory valuation at cost for working out cost of goods sold. Hand those to your bookkeeper, or drop them into your own P&L. See the sales reports.
Frequently asked questions
Is net income the same as net profit?
For a small business, yes. Net income, net profit, net earnings and the bottom line all mean the revenue left after every expense for the period.
Is net income the same as net sales?
No. Net sales is revenue after discounts and refunds, the top line. Net income is what’s left after subtracting cost of goods sold, operating expenses, interest and taxes, the bottom line.
What is the net income formula?
Net income = total revenue − total expenses. In more detail: net sales − cost of goods sold − operating expenses − interest − taxes.
Where is net income on the income statement?
It’s the last line of the income statement (profit and loss statement), after all costs have been subtracted.