How to calculate net income
Learn how to calculate net income with a simple formula, a worked example and clear steps for your business.
December 2023 | Published by Xero
Published Thursday 6 August 2026
Table of contents
Net income (and its equation) is the same as net profit.
Key takeaways
- Net income is your total revenue minus all expenses, taxes and deductions. It's also called net profit, net earnings or the bottom line, and it shows how much your business actually keeps.
- To calculate net income, start with total revenue, subtract the cost of goods sold to find gross profit, then subtract operating expenses, interest and taxes.
- Tracking net income regularly helps you assess profitability, plan budgets, apply for funding and make confident decisions about your business.
- Automating your bookkeeping with cloud accounting software makes it faster and easier to generate accurate profit and loss reports.
What is net income?
Net income is the total amount of money your business keeps after subtracting all expenses, taxes and deductions from your revenue. It's the figure that sits at the bottom of your income statement, which is why it's often called the bottom line.
You might also hear net income referred to as net profit or net earnings. These terms all mean the same thing: the money left over once every cost of running your business has been accounted for.
Net income gives you a clear picture of your actual profitability. While revenue tells you how much money comes into your business, net income tells you how much you get to keep.
Hong Kong small businesses track net income to evaluate performance, plan for growth and prepare for profits tax filing with the Inland Revenue Department (IRD).
Why net income matters
Knowing your net income is one of the most practical ways to understand whether your business is financially healthy. It shows you whether you're making a profit or operating at a loss after every cost has been paid.
Net income helps you make better decisions about your business. You can use it to set realistic budgets, plan for growth and identify areas where you could cut costs or increase revenue.
If you're applying for a business loan or seeking investment, lenders and investors will look at your net profit as a key indicator of your business's viability. A strong bottom line builds confidence that your business can meet its financial obligations.
For Hong Kong businesses, net income also plays a role in profits tax obligations. Understanding your net earnings helps you plan for your annual tax filing with the IRD and manage cash reserves accordingly.
Net income formula
The net income formula is straightforward. At its simplest, it looks like this:
Net income = Total revenue − Total expenses − Taxes
For a more detailed calculation, you can break expenses down further:
Net income = Total revenue − COGS − Operating expenses − Interest − Taxes
Here's what each part means:
- Total revenue: the full amount your business earns from sales before any deductions
- Cost of goods sold (COGS): the direct costs of producing or purchasing the products you sell
- Operating expenses: the day-to-day costs of running your business, such as rent, utilities and salaries
- Interest: any interest paid on business loans or credit
- Taxes: profits tax or other taxes your business owes
How to calculate net income step by step
Calculating net income is a step-by-step process. Follow these steps to work out your business's net profit for any given period.
1. Add up your total revenue
Start by calculating all income your business earned during the period. This includes sales revenue, service fees and any other income such as interest earned or rental income. Use your profit and loss report in Xero Accounting Software to pull this figure automatically.
2. Calculate your cost of goods sold
Work out the direct costs associated with producing or purchasing the goods you sold. This includes raw materials, manufacturing costs and direct labour. Subtract COGS from your total revenue to find your gross profit.
3. Subtract your operating expenses
Deduct all the ongoing costs of running your business. These include rent, utilities, insurance, marketing, office supplies and employee salaries. These are the expenses that aren't directly tied to producing your product but are essential to keeping your business running.
4. Deduct interest payments
If your business has loans, credit lines or other forms of debt, subtract the interest you've paid during the period. This gives you a more accurate picture of your net earnings.
5. Subtract taxes
Finally, deduct the taxes your business owes. For Hong Kong businesses, this is typically profits tax filed with the Inland Revenue Department. The figure you're left with is your net income.
Example of a net income calculation
Seeing the net income formula in action makes it easier to understand. Here's a worked example using a Hong Kong small business.
Let's say your business earns HK$350,000 in revenue over a quarter. Your costs break down as follows:
- Cost of goods sold: HK$140,000
- Operating expenses (rent, salaries, utilities): HK$30,000
- Taxes owed: HK$60,000
The net income calculation would be:
HK$350,000 − HK$140,000 − HK$30,000 − HK$60,000 = HK$120,000
Your net income for the quarter is HK$120,000. This is the profit your business gets to keep after all expenses and taxes have been paid. You could reinvest this back into the business, save it for future expenses or distribute it to owners.
Calculating net income from gross profit
If you already know your gross profit, you can calculate net income by subtracting your remaining expenses from that figure. This approach is useful when your accounting records separate direct costs from operating costs.
The formula looks like this:
Net income = Gross profit − Operating expenses − Interest − Taxes
Using the same figures from the example above, your gross profit is HK$210,000 (HK$350,000 revenue minus HK$140,000 COGS). From there:
HK$210,000 − HK$30,000 − HK$60,000 = HK$120,000
The result is the same: HK$120,000 net income. Starting from gross profit simply means you've already accounted for your cost of goods sold in a previous step.
How to measure a good net income (net profit margin)
A raw net income figure doesn't tell you much on its own. To understand whether your net income is healthy, calculate your net profit margin.
Net profit margin measures net income as a percentage of revenue. The formula is:
Net profit margin = Net income ÷ Revenue × 100
Using the example above, your net profit margin would be:
HK$120,000 ÷ HK$350,000 × 100 ≈ 34%
As a general benchmark, a net profit margin of around 10% is considered healthy for most small businesses, though this varies by industry. Retail businesses often have lower margins, while service businesses may have higher ones. You can learn more about ways to measure your profitability to track performance over time.
Net income vs gross profit
Gross profit and net income measure different things, and understanding the difference is important for managing your finances accurately.
Gross profit is your total revenue minus the cost of goods sold. It shows how much money you make from selling your products or services before accounting for operating expenses, interest and taxes.
Net income goes further. It subtracts all remaining expenses from your gross profit, giving you the final profit your business keeps. In short, gross profit is revenue minus cost of goods sold, while net income is revenue minus all expenses and taxes.
If your gross profit is healthy but your net income is low, it could mean your operating costs are too high. Reviewing both figures side by side helps you pinpoint where your money is going.
Net income vs operating income
Operating income and net income are related, but they capture different stages of profitability.
Operating income (sometimes called operating profit) is the profit your business earns from its core operations. It equals revenue minus the cost of goods sold and operating expenses, but before interest and taxes are deducted. You may also see this referred to as EBIT (earnings before interest and taxes) or, when depreciation and amortisation are added back, EBITDA. For more detail, see the guide on net operating profit after tax.
Net income takes operating income a step further by subtracting interest payments and taxes. It represents the final profit available to business owners after every cost has been accounted for.
Net income vs cash flow
Net income and cash flow are related but they don't always tell the same story. A profitable business on paper can still struggle with cash flow if payments come in slowly or large expenses hit at the wrong time.
Net income is an accounting measure. It's calculated based on revenue earned and expenses incurred during a period, regardless of when the actual money changes hands. This is known as accrual accounting.
Cash flow tracks the actual movement of money in and out of your business. It includes everything from customer payments and loan repayments to money spent on equipment.
For Hong Kong small businesses, keeping an eye on both figures is essential. Your net earnings might look strong, but if your customers are slow to pay their invoices, you could face a cash shortfall. Using cash flow tracking tools helps you stay on top of both.
Common mistakes when calculating net income
Getting your net income right depends on accurate data and careful calculations. Here are some of the most common errors to watch out for:
- Forgetting to include all expenses: it's easy to overlook smaller costs like bank fees, software subscriptions or professional services. Make sure every business expense is accounted for.
- Mixing up personal and business expenses: keep your personal and business spending separate. Including personal costs in your business expenses will distort your net profit figure.
- Not accounting for depreciation: assets like equipment and vehicles lose value over time. Failing to include depreciation as an expense can make your net income look higher than it actually is.
- Using the wrong time period: make sure your revenue and expenses cover the same period. Mismatched dates lead to inaccurate results.
- Relying on manual calculations: spreadsheets are prone to human error. Using cloud accounting software to automate your bookkeeping reduces mistakes and saves you time.
Track your net income with Xero
Calculating net income doesn't have to be a manual process. Xero Accounting Software automatically pulls your revenue and expenses together, so you can generate a profit and loss report in seconds and see your bottom line at a glance.
With real-time reporting, bank feeds and automated reconciliation, you'll spend less time on bookkeeping and more time running your business. Try Xero today and get one month free.
FAQs on how to calculate net income
Here are answers to common questions about calculating net income for your business.
Is net income the same as net profit?
Yes, net income and net profit mean the same thing. Both terms refer to the amount left after subtracting all expenses and taxes from your total revenue.
Is net income calculated before or after tax?
Net income is calculated after tax. It represents your final profit once all expenses, including taxes, have been deducted from revenue.
What is a good net income for a small business?
A good net income depends on your industry and business model. As a general guide, a net profit margin of around 10% is considered healthy, though service businesses often achieve higher margins while retail tends to be lower.
Can net income be negative?
Yes, net income can be negative. A negative net income means your business spent more than it earned during the period, resulting in a net loss. This can happen during periods of heavy investment, seasonal slowdowns or unexpected expenses.
What is the difference between net income and operating income?
Operating income is profit from core business operations before interest and taxes. Net income is the final profit after all costs, including interest and taxes, have been deducted.
How often should you calculate net income?
Most businesses calculate net income monthly or quarterly to stay on top of financial performance. Regular tracking helps you catch issues early, plan ahead and prepare for your annual profits tax filing.
Related terms
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.