Whether you run your own business or work as an independent contractor, knowing your net income can mean the difference between thriving and struggling. As the number of insolvencies among small businesses in Canada increased to 8.8% in 2024 compared to the year before it, understanding this financial metric can help you make smarter decisions so your business will continue to grow.
What is Net Income?
Net income is the money you get to keep after paying for everything needed to run your business. For solopreneurs and freelancers, knowing your net income is important because it directly impacts your personal earnings and the growth of your business.
It gives you a clear picture of your financial health. Consistently positive net income means your business is sustainable and can grow over time.
Knowing your net income also helps you decide when to reinvest in your business. Whether you’re deciding to hire employees, launch a new product, or enter a new market, knowing your net income helps you make informed decisions based on your business’s profitability.
Your net income typically appears at the bottom of your income statement since it represents the final financial outcome after all revenues and expenses have been calculated. Effective bookkeeping practices help you track this metric each month, giving you a clear understanding of your true earnings potential.
Net Income vs. Gross Income
The only difference between net income and gross income is that the latter doesn’t account for expenses.
Gross income represents the total revenue generated before subtracting any business costs. Net income, in contrast, reflects the actual profit after deducting all operational expenses, taxes, and other financial obligations.
While gross income shows how much money your business is bringing in, net income shows how much profit you’re actually making. Net income is a more accurate reflection of your business’s financial performance and profitability.
How to Calculate Net Income
The basic formula for net income is Net Income = Total Revenue – Total Expenses.
To calculate, take all the money your business made (total revenue) and subtract everything you spent (total expenses). The result is your net income, which shows how much profit your business earned.
Your total revenue is the sum of all income streams your business generates, including sales of products or services, consulting fees, and affiliate income. Make sure to track all revenue sources accurately to get a true picture of your finances.
Meanwhile, expenses are the costs you incur while running your business, like rent, utilities, supplies, and salaries. You also have to account for taxes, which can significantly impact your net income.
Take note that you have to know your net income to calculate tax liability. If you’re employed and freelance or do your business on the side, you still have to pay taxes on the services or products you provide. The amount depends on the total income you generate and your specific tax bracket.
Net Income Calculation Examples
Let’s say you’re a graphic designer who gets commissions and sells design templates online. If you earned $50,000 from projects and $5,000 from digital products last year, your total revenue or gross income would be $55,000.
Next, you need to consider your work-related expenses, such as:
- Software Subscriptions (e.g., Adobe Creative Cloud): $2,400
- Office Supplies: $600
- Marketing and Advertising: $1,200
- Internet and Utilities: $1,000
- Taxes: $5,000
All of these amount to $10,200. Subtract it from your total revenue, which results in a net income of $44,800.
Another example would be a solopreneur who earns from jewelry sales and custom orders. If they get a total of $90,000, they should deduct the following expenses:
- Cost of Goods Sold (COGS) (materials and production): $30,000
- Shipping and Packaging: $5,000
- Website Hosting and Maintenance: $1,200
- Marketing and Advertising: $4,800
- Utilities: $1,500
- Taxes: $7,500
With a total expense of $49,000, they’ll have a net income of $41,000.
Net Income Formula for Microsoft Excel
Calculating your net income using Microsoft Excel is easy with its SUM and deduct functions. Start by creating columns for revenue and expenses.
Under the revenue column, list all income sources with their respective amounts and use the SUM function (“=SUM(Cell1:Cell2)” or “=SUM(Cell1,Cell2,Cell3)”) to get the total income.
In the expenses column, itemize all business expenses, such as cost of goods sold (COGS), rent, utilities, supplies, marketing, and taxes. Again, use the SUM function to calculate the total expenses.
Then, use a simple subtraction formula with the appropriate cells to calculate your net income automatically.
Net Income Formula for Google Sheets
It’s also easy to create an income statement if you prefer the cloud feature of Google Sheets for easy accessibility and collaboration. Just like in Excel, start by creating separate columns for revenue streams and expense categories. You can use the same SUM and subtraction functions as the ones in Excel.
Net Income and Revenue
By comparing your net income to your revenue, you can see how much profit you are making from each dollar of sales. This helps you identify if your income is growing or if your expenses are eating into your profits.
For example, if you see that your net income is decreasing while your revenue stays the same, it might be time to look at your expenses and see where you can save money. Maybe you can find a cheaper software subscription or reduce your marketing costs. This helps you ensure your business remains profitable and can continue to grow.
Net Profit Margin
Profit margin is a key financial metric that shows how much profit your business makes for every dollar of revenue. Calculate it by dividing your net income by your total revenue and then multiplying by 100 to get a percentage.
For example, if your business earns $50,000 in revenue and has a net income of $10,000, your net profit margin is 20%. This means you keep 20 cents of every dollar you earn after covering all your costs.
Knowing your net profit margin helps you develop targeted strategies for long-term sustainability.
Net Income vs. Cash Flow
While net income provides a snapshot of profitability, cash flow reveals the actual liquidity of your business. Tracking both metrics helps you invest in growth opportunities and manage unexpected costs.
Cash flow is the actual money moving in and out of your business. It shows how much cash you have on hand at any given time, including all the revenue you receive and all the expenses you pay.
It also considers things like loans, investments, and other financial activities. For instance, you might have a high net income but low cash flow if a lot of your sales are on credit and you haven’t received the money yet.
Impact of Taxes on Net Income
One way taxes impact your net income is through tax deductions. Tax deductions lower your taxable income, which means you pay less in taxes.
For instance, if you spend $1,000 on office supplies, you can deduct that from your revenue. For sole proprietorships and partnerships, fuel costs, delivery fees, insurance, legal, accounting, and other professional fees can be deducted, which can significantly reduce your tax burden.
There are also different types of taxes that affect your net income:
- Income Tax: This is the tax you pay on your net income. The amount depends on your earnings and tax bracket.
- Self-Employment Tax: If you’re self-employed, you pay both the employer and employee portions of Social Security and Medicare taxes.
- Sales Tax: If you sell products, you might need to collect and pay sales tax to the government.
Make sure to keep detailed records of your business expenses and income for accurate tax reporting.
Tips to Increase your Net Income
Aside from looking for more income streams, there are many ways to improve your net income. Check these innovative ways to cut costs without compromising the quality of your products or services.
1. Review and Adjust Your Pricing Strategy
Understanding your value proposition is key to setting the right prices for your services. Your value proposition is what makes your business unique and why clients choose you over others.
To know your value proposition, ask yourself what specific benefits you offer to your clients. Do you provide faster service, higher quality work, or specialized expertise? By being clear about the value you bring, you can adjust your rates confidently to match the profit you deserve.
2. Create a Referral Program to Bring In More Clients
When your current clients are happy with your services, they’re more likely to tell their friends and family about your business. Encourage them to do so by offering incentives that reward them for each new client they refer.
If you’re a freelance writer, you could offer a discount on future projects for every friend a client refers to you. 88% of clients are more likely to trust a brand recommended by family or friends, which means your clients already did the gruntwork of building credibility for you.
3. Upsell and Cross-Sell to Existing Clients
Look for opportunities within your current client base to offer additional services or upgrade packages. Selling to existing customers is more likely to happen by as much as 70% since they already know and trust your services.
If you’re a freelance graphic designer, you might notice that a client who hires you for a logo also needs business cards and a website. You can pitch these additional design services to help the client get a complete branding package.
Another effective strategy to boost your net income is to bundle services. Creating packages that combine multiple services at a value price encourages clients to purchase more from you.
Freelance writers can create a package that includes blog posts, social media content, and newsletter writing at a discounted rate compared to buying each service separately. For web developers, a comprehensive package, including website design, SEO optimization, and ongoing maintenance, would be attractive to clients who are looking for a comprehensive web solution.
4. Outsource Non-Core Tasks
Take a step back and check which tasks are consuming most of your time but aren’t directly generating income. These might include administrative work, bookkeeping, or social media management.
When you delegate these tasks, you can focus on the steps to grow your business. For instance, you can contract professionals to help you stay on top of your financial records. Just make sure you know the difference between bookkeepers vs accountants to know which one suits your business needs.
Aside from outsourcing, using the right tools can help you automate repetitive tasks, saving you time and money. Use small business bookkeeping software to automate repetitive tasks like billing, invoice creation, and expense tracking.
5. Audit Your Expenses Regularly
Going over your expenses regularly will help you spot unnecessary or redundant costs that drain your profit. For example, you might discover that you’re paying for a software subscription you rarely use, and canceling it can save you $100 a month.
Another common unnecessary cost is overstocking supplies. By keeping track of your inventory and ordering only what you need, you can avoid waste and lower your expenses.
6. Maximize Tax Deductions and Credits
Every dollar you spend on your business, from office supplies to software subscriptions, can potentially reduce your tax bill. For instance, if you use a dedicated space in your home exclusively for work, you may be able to deduct a portion of your rent, utilities, internet, and home maintenance costs.
Net Income Insights for Sustainable Profitability
Knowing how to calculate your net income allows you to take control of your financial health and make decisions confidently. The insights you get can help you find opportunities to cut costs and increase revenue.
As you focus on growing your business, let EpicBooks worry about the numbers. From accurate bookkeeping and revenue tracking to stress-free tax preparation and payroll management, we provide specialized services tailored to your needs.
Frequently Asked Questions
How Often Should I Calculate My Net Income?
Calculate your net income at least once a month to be aware of how your business is performing. Monthly calculations make it easier to spot patterns, such as whether expenses are increasing or revenue is growing.
For freelancers and solopreneurs, this can also help you plan for tax season and avoid cash flow issues. The more frequently you review your net income, the faster you can adjust your strategies to maintain profitability.
Is Net Income a Salary?
No, net income is not the same as a salary. Net income is the total profit your business makes after subtracting all expenses, such as operating costs, taxes, and other deductions, from your total revenue. On the other hand, a salary is a fixed payment you, as a business owner or employee, might pay yourself for your work.
For freelancers and small business owners, salaries often come from the business’s net income. After calculating your net income, you can decide how much of it to take as your personal earnings and how much to reinvest in your business.
For example, if your business earns $50,000 in net income monthly, you may choose to pay yourself $40,000 as a salary and leave $10,000 to cover future expenses or grow the business.
Can Net Income Be Negative?
Yes, net income can be negative, and this is called a net loss. It occurs when your expenses, such as operating costs, taxes, or loan payments, are higher than your total revenue.
While a negative net income isn’t ideal, it can happen, especially in the early stages of running a business or during slow periods. If you find your net income is consistently negative, it’s a sign to reassess your business strategy. Look at where you can cut costs, increase revenue, or find new income streams to turn things around.
Can I Track Net Income Without Hiring An Accountant?
Yes, many freelancers and small business owners track their net income without hiring an accountant. With tools like Microsoft Excel, Google Sheets, or accounting software like QuickBooks readily available, you can now organize your revenue and expenses, automate calculations, and generate reports.
However, as your business grows, you should hire an accounting professional to save you time and maintain accuracy. Accountants and bookkeepers can also help you identify tax-saving opportunities and advise you on how to improve your financial health.
