net income is a profitability indicator of a company or an investment. This profit corresponds to the entire amount of revenue, minus all costs arising from the activity.
That is, net income is the result of the following calculation: total revenue minus total cost. Thus, a company that wants to calculate its net profit must add up all its sales revenue and deduct from it all expenses, such as salaries, taxes and raw materials.
This indicator is important for investors to know what the return on their investment is, if it is as expected or if it needs to reduce costs, for example.
Difference between net profit and gross profit
Gross profit and net profit are two important financial indicators, but they reflect the company's results considering different aspects.
Net income, as explained above, is the result of total revenue minus total costs. O gross profit, in turn, is the result of total revenue minus variable costs.
- Net income measures the income of the business considering all the expenses for its operation.
- Gross profit assesses how production-related costs impact the company's return.
To better understand the difference between the two profits, let's understand what fixed costs and variable costs are.
fixed costs
Fixed costs are all expenses arising from the activity of a company, which regardless of the quantity of products produced. That is, this cost will be the same whether the company produces 10 or 1000 products.
Examples of fixed costs: salaries of employees and the rent of a property.
Variable costs
Variable costs are those that vary according to the quantity of products produced. This means that the more products produced, the greater the variable cost.
Examples of variable costs: raw material for the production of products or the electric energy used to produce a larger quantity of products.
know more about income and expenses, tribute and raw material.
How to calculate net income?
Basically, net income is calculated as the sum of total revenues minus total costs. Total revenue is the multiplication between the quantity of products sold and the price of those products (price x quantity).
Consider the example of a company that sells notebooks for 10 reais and that in one month sold 1,000 notebooks. In this case, 10 x 1,000 = 10,000.
Total revenue: 10.000
For the maintenance of its activities, the company has costs with employees, electricity, water, taxes and raw materials totaling 6,000 reais.
Total cost: 6.000
The net income being determined by the formula: Total Revenue - Total Cost, we will have the following result:
10.000 - 6.000 = 4.000
Net profit: 4.000
In this case, the company's net profit is 4,000 reais. This value may or may not be satisfactory and the investors or owners of the company will make this assessment.
To assess whether the company's profitability is satisfactory, it is necessary to consider the performance of competitors, the profitability of other types of investments and also the initial investment made to open the business.
If the result of the net income calculation is negative, we have a situation of prejudice and not profit. This happens when the costs exceed revenue value.
See also the meaning of profit, real profit and presumed profit.