Compute Basic Net Income
Edited by Rose B, Christine dela Cruz, Eng
If you have a small business and would want to know your net income, it is so simple to calculate. However it is surprising how many first time business owners are unclear on these calculations. For this reason you will see the steps are short but I have taken the time in the Tips section to go into more detail.
- 1List all your business income.Advertisement
- 2List all your business expenses.Advertisement
- 3Deduct the business expenses from the business income and you will get the net income.
Important Things to Consider about Basic Net Income
- 1Income is not equal to actual sales. In getting the actual sales in the business, there are expenses involved. There are also two types of expenses:Advertisement
- Fixed expenses / cost. Fixed expenses are those expenses that will occur anyway, whether or not a certain client or business is pursued. An example of this is office rental. Whether or not you are going to a meeting with a client to close a deal and whether or not you get that deal, the office rental remains as a cost every month. In other words, fixed expenses or costs are not dependent on actual sales activities. These are more of core operating expenses and are occurring on a regular basis.
- Variable expenses / cost. Variable expenses or costs are those that are directly linked to particular activities leading to a sale. For instance, you have to fly to another country to meet with the Purchasing Director of a large supermarket that you are targeting. The airfare is a variable cost and is attributed directly to this particular transaction. If this particular client do not require another trip, then your variable cost does not have to repeat every month.
- 2Net income is crucial to consider when looking at business cash flow. Cash flow is one of the most common bottlenecks in a business. If net income is significantly lower compared to costs, both fixed and variable, that's when cash flow becomes a problem. In these cases, financial borrowings may be required. The interest for these loans must also be taken into consideration when calculating net income later on.
- 3Costs have to be allocated accordingly to be able to see which aspects of business are not able to produce accordingly. For instance, it is logical to see that there are more costs in the sales department when you are at the stage of your business where you are still trying to generate new accounts. If you do a thorough analysis of your net income, you will be able to identify where you might be spending too much when it's not really necessary and take necessary actions to correct that. In business, it is very important to do regular analysis of your operations, so that you are able to see problems as they arise and act upon them the soonest possible time before the issue gets bigger.
Tips & Tricks
- This is just the basic net income. You have a different computation for your taxable income.
- In computing your income and expenses, you can make use of the cash basis or the accrual basis.
- Your business income is the earnings of your business, whether paid or unpaid under the accrual basis.
- Your business income is the earnings of your business which are received under the cash basis.
- Your business expenses are the expenses incurred by your company, whether paid or unpaid under the accrual basis.
- Your business expenses are the expenses paid by your business for promotion, marketing and operation.
- If you deduct the expenses from the income and you get a positive result, you have a net income.
- If you deduct the expenses from the income and you get a negative result, or it means that you have paid or incurred more than what you received, then you have a net loss.
- You can compute for your net income on a daily basis, monthly basis, quarterly or annually, depending on the needs of your business.
- If you need to file your tax return, you have to compute for your taxable net income which is a more detailed computation than the steps above.
Categories : Accounting
Recent edits by: Christine dela Cruz, Rose B