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What is net income?

What does net income mean?

Net income, or net profit or earnings, is a financial metric representing the total amount of money a business earns after deducting all expenses and taxes from its total revenue. Simply, it is the remaining amount of money a business has made after accounting for all costs associated with running its business.

Net income is a crucial figure for investors and stakeholders as it clearly indicates how well a company is performing financially. A higher net income typically signifies a successful and profitable business, while a lower net income may indicate financial challenges or inefficiencies.

How to calculate net income

To calculate net income, subtract all expenses, such as cost of goods sold, operating expenses, interest expenses, and taxes, from total revenues. Once you have deducted all expenses from revenues, you will arrive at the net income figure.

By calculating net income, businesses can assess their financial health and make informed decisions about their operations.

Overall, net income is a critical indicator of a company’s financial health and success. By closely monitoring and analysing this figure, businesses can better understand their profitability and make informed decisions to drive growth and achieve long-term success.

Example of net income calculations

Say you are the owner of a large tech company with a revenue of $100 billion in the recent quarter. Your expenses for the same quarter amounted were distributed as follows:

  • Cost of Goods Sold (COGS): $40 billion
  • Selling, General & Administrative (SG&A): $15 billion
  • Research & Development (R&D): $5 billion
  • Taxes: $10 billion

Adding these values together, we get the total expenses:

Total Expenses = COGS + SG&A + R&D + Taxes = $40 billion + $15 billion + $5 billion+ $10 billion = $70 billion

Following the formula, your tech business’s net income would be:

Net Income = $100 billion (Revenue) – $70 billion (Expenses) = $30 billion

Therefore, in this simplified example, your net income for the quarter would be $30 billion.

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