How to calculate net income

Published Thursday 23 July 2026

Table of contents

• What is net income?
• Net income formula
• How to calculate net income step by step
• Net income calculation example
• Calculating net income from gross profit
• Why net income matters for your business
• Net income vs gross profit
• Limitations of net income
• Track your net income with Xero
• FAQs on net income

Key takeaways

• Net income is your total revenue minus all expenses, including cost of goods sold, operating expenses, interest and taxes. It's the final profit figure on your income statement.
• The net income formula is: Revenue - COGS - Operating Expenses - Interest - Taxes = Net Income. You can also calculate it by subtracting total expenses from gross profit.
• Tracking net income regularly helps you assess profitability, make informed business decisions and present a clear financial picture to lenders or investors.
• Net income differs from gross profit because it accounts for all business costs, not just the direct cost of producing goods or services.

What is net income?

Net income is the total profit your business earns after subtracting every expense from your revenue. It's often called "the bottom line" because it appears as the last line on your income statement.

Your income statement (also known as a profit and loss statement) starts with revenue at the top and works downward through various expense categories. Once you've deducted cost of goods sold, operating expenses, interest and taxes, the figure that remains is your net income.

This single number tells you whether your business is genuinely profitable. A positive net income means you're earning more than you're spending, while a negative net income (a net loss) signals that expenses have outpaced revenue.

Net income formula

The net income formula gives you a straightforward way to calculate your bottom line. At its simplest, it looks like this:

Net Income = Total Revenue - Total Expenses

For a more detailed view, you can break total expenses into their key components:

Net Income = Revenue - Cost of Goods Sold - Operating Expenses - Interest - Taxes

This expanded version helps you see exactly where your money goes. Revenue is the total amount your business earns from sales before any deductions. Cost of goods sold (COGS) covers the direct costs of producing your products or delivering your services. Operating expenses include rent, utilities, wages, marketing and other day-to-day running costs. Interest refers to payments on any business loans or credit. Taxes are the income tax obligations your business owes.

How to calculate net income step by step

Calculating net income is simpler than it looks when you break it into 5 clear steps. Follow this process using figures from your income statement or accounting records.

Step 1: Start with your total revenue

Revenue is the total income your business generates from selling goods or services during a specific period. This figure sits at the very top of your income statement.

Include all sales revenue, service fees and any other operating income. Don't subtract any costs yet; you need the full picture of what came in before working out what went out.

Step 2: Subtract cost of goods sold

COGS represents the direct costs tied to producing or delivering what you sell. For a retail business, this includes the wholesale cost of inventory. For a service business, it might include direct labour or materials.

Subtracting COGS from revenue gives you your gross profit. This intermediate figure shows how much you earn before accounting for broader business expenses.

Step 3: Deduct operating expenses

Operating expenses are the ongoing costs of running your business that aren't directly tied to production. Common examples include rent, utilities, office supplies, insurance, marketing costs and employee salaries.

Subtract these from your gross profit to arrive at your operating income. This figure reflects how profitable your core business activities are.

Step 4: Factor in non-operating costs

Non-operating costs sit outside your day-to-day business activities. The most common example is interest expense on business loans, lines of credit or other financing.

You should also account for any non-operating income here, such as investment returns or gains from selling assets. Subtract non-operating costs and add non-operating income to your operating income.

Step 5: Subtract taxes

The final step is deducting your income tax obligation. In Australia, the company tax rate for base rate entities (with aggregated turnover under $50 million) is 25%.

After subtracting taxes, the figure you're left with is your net income. This is the true profit your business has earned for the period.

Net income calculation example

A worked example makes the net income formula easier to follow. Let's say you run a small retail business in Melbourne and want to calculate your net income for the financial year.

Here are your figures for the year:

• Total revenue: $480,000
• Cost of goods sold: $192,000
• Operating expenses (rent, wages, utilities, marketing): $168,000
• Interest on a business loan: $6,000

First, calculate gross profit: $480,000 - $192,000 = $288,000.

Next, subtract operating expenses: $288,000 - $168,000 = $120,000.

Then, deduct interest: $120,000 - $6,000 = $114,000. This is your pre-tax income.

Finally, subtract tax at 25%: $114,000 - $28,500 = $85,500.

Your net income for the year is $85,500. This means that for every dollar of revenue, roughly $0.18 ended up as profit after all expenses were paid.

Calculating net income from gross profit

If you already know your gross profit, you can use a shorter path to reach net income. This approach is handy when your accounting software or income statement provides gross profit as a starting point.

The formula is:

Net Income = Gross Profit - Operating Expenses - Interest - Taxes

Using the Melbourne retail example above, your gross profit was $288,000. Subtract operating expenses ($168,000), interest ($6,000) and tax ($28,500), and you arrive at the same net income of $85,500.

This method skips the revenue and COGS step because gross profit already accounts for them. It's particularly useful when comparing profitability across periods where your cost of goods sold stays relatively stable.

Why net income matters for your business

Net income is one of the most important numbers on your financial statements. It gives you a clear, complete picture of your business's profitability after every cost has been accounted for.

Profitability assessment: Net income tells you whether your business is actually making money. Revenue alone can be misleading; a business with $500,000 in revenue but $510,000 in total expenses is running at a loss. Net income cuts through the noise.

Financial health monitoring: Tracking net income over time reveals trends. A steadily rising net income suggests your business is growing efficiently. A declining figure, even alongside rising revenue, could signal that costs are creeping up and need attention.

Smarter business decisions: When you know your true profit, you can make better choices about pricing, hiring, investing in equipment or expanding into new markets. Net income gives you the confidence to act on real numbers rather than guesswork.

Attracting lenders and investors: Banks and investors look at net income to assess whether your business can repay loans or generate returns. A healthy, consistent net income strengthens your position when seeking external funding.

Net income vs gross profit

Net income and gross profit are both measures of profitability, but they tell you different things about your business. Understanding the distinction helps you interpret your financial reports accurately.

Gross profit is your revenue minus only the cost of goods sold. It shows how efficiently you produce or source what you sell, but it doesn't account for rent, wages, marketing, interest or taxes. A strong gross profit with a weak net income often points to high overhead costs.

Net income goes further by subtracting all remaining expenses from gross profit. It's the complete picture of profitability. Two businesses could have identical gross profit figures but very different net incomes depending on how they manage operating costs, debt and tax obligations.

In short, gross profit measures production efficiency while net income measures overall business profitability. You need both figures, but net income is the one that tells you how much money your business truly keeps.

Limitations of net income

While net income is a valuable metric, it doesn't tell the whole story. Being aware of its limitations helps you avoid drawing incomplete conclusions from a single number.

Non-cash expenses can distort the picture: Net income includes non-cash items like depreciation and amortisation. These reduce your reported profit without affecting the actual cash in your bank account. A business might show a low net income but still have healthy cash reserves.

Accrual accounting vs cash reality: If your business uses accrual accounting (as most do), net income reflects revenue when it's earned and expenses when they're incurred, not when cash actually changes hands. You could report strong net income while waiting on overdue invoices.

Accounting assumptions vary: Different methods for valuing inventory, depreciating assets or recognising revenue can all affect net income. Two identical businesses using different accounting methods could report different net income figures for the same period. Always consider the accounting policies behind the numbers.

Track your net income with Xero

Calculating net income manually takes time, and small errors can throw off your results. Xero's accounting software automates the process by pulling your revenue, expenses and tax data into real-time profit and loss reports.

With Xero, you can monitor your net income across any period, spot trends before they become problems and generate reports that are ready to share with your accountant or lender. Bank transactions flow in automatically, categories stay organised and your financial data is always up to date. Get one month free.

FAQs on net income

Here are answers to some frequently asked questions about net income.

Is net income the same as profit?

Net income is often used interchangeably with "net profit" and they mean the same thing. However, "profit" on its own can refer to gross profit or operating profit, so it's important to specify which type you're discussing.

Is net income before or after tax?

Net income is calculated after tax. The figure before tax is called "pre-tax income" or "earnings before tax." Net income represents the final amount left once all expenses, including taxes, have been deducted.

What is a good net income?

A "good" net income depends on your industry, business size and growth stage. A common benchmark is a net profit margin (net income divided by revenue) of 10% or higher, but many small businesses operate successfully with lower margins while reinvesting in growth.

What's the difference between net income and cash flow?

Net income measures profitability based on your accounting records, while cash flow tracks the actual movement of money in and out of your business. You can have positive net income but negative cash flow if customers haven't paid their invoices yet.