Net income (sometimes called net profit) is the money left over after paying all the expenses of running your business. It includes every dollar that’s earned from selling products and/or services, minus any money spent on marketing, R&D, operations, sales, and anything else you might spend money on as an entrepreneur.
It’s a simple calculation – total revenue minus total expenses – and it’s the single most important number to pay attention to as you grow your business and make decisions about what to do with your profits.
However, things get confusing when you realize that there’s another figure to keep in mind: net revenue. Even though it’s often used interchangeably with net income, they are not actually the same thing. They require two different calculations, and you can use both metrics to help you determine your net margin.
Read on, and we’ll explain the differences between all of these terms.
What Is the Difference Between Gross & Net Revenue?
Gross revenue is the total amount of money you bring in. Net revenue means the gross revenue minus any costs associated with running your business, including rent and utilities, marketing expenses, and salaries.
The net revenue formula is as follows:
Net Revenue = Gross Revenue – Direct Selling Expenses
A direct selling expense is any cost directly associated with making a sale. Some examples of direct selling expenses include:
- Advertising and outreach
- Commissions
- Direct labor costs
- Shipping and processing costs
Direct selling expenses DO NOT include:
- Administrative expenses
- Supervisory costs
- Facility costs and rent
Those types of expenses are instead used to find net income, as that does take into account indirect expenses. Net income is calculated by subtracting operating costs and taxes from net revenue.
For example, if you have net revenues of $100,000 but operating costs of $60,000 and tax expenses of $20,000 your net income would be $20,000.
Net Income = Gross Revenue – Total Expenses
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How to Find Your Net Margin
To compare net income over time, it’s useful to calculate the net margin, which equals the net income divided by net revenue. Net income is a company’s net profit from its operations after deducting all expenses from revenues. It is often shown as net earnings or net earnings per share.
Net margin can be interpreted as a percentage—it indicates what portion of every dollar in net revenues is going toward covering operational expenses.
Net Margin = Net Income/Net Revenue
Let’s assume that XYZ Company earns $1 million in net revenues for a year but has an operating expense of $800,000. The company’s net income would be $200,000 ($1 million – $800,000).
The percentage difference between net income and net revenue can be calculated by dividing net income by net revenue. So, we would divide 200,000 by 1 million to get 0.2 or 20%. Net income is then expressed as a percentage of net revenue.
In this example, the net margin is (200,000/1 million) * 100% = 2%. If the net margin increases, then the net income increases relative to the net revenue. If Net Margin decreases then net income is decreasing relative to net revenue.
Net margins are reported as whole numbers without decimal places because they are typically viewed on a quarterly basis, so there isn’t much need for accurate estimates within a quarter.
The Benefits of Knowing Your Net Revenue
Knowing your business’s total net revenue is important for many reasons, such as knowing how much profit you have made, what your expenses are, and what to charge for future services. It’s also helpful to know if you are making a profit or losing money. It’s also a very important metric for investors, as it helps them decide whether your company is worth investing in; if you have low net revenue and income year after year, they may pull their investments. You can also use this figure to determine how your company is doing in comparison to your competitors.
The best way to keep track of all this information is with a simple spreadsheet that calculates your income and expenses. You can calculate net income by subtracting the amount of costs from the amount of revenue.
Summing Up Gross Revenue, Net Revenue, and Net Income
Net revenue and net income are sometimes used interchangeably, but they are not the same thing! Net revenue is your total (or gross) revenue minus the cost of direct selling expenses, whereas net income takes indirect selling expenses into account.
Your net revenue is one of the most important figures to pay attention to as you grow your business and make decisions about what to do with your profits.
Reach Out to E-Boost Today
Business loans can help to improve your net revenue by allowing you to take on more profitable ventures. If you have a business that’s already making money, and you’re looking for ways to expand, a loan can be the answer.
Loans are also a good option if you’re just starting out and need some capital to get your operation up and running.
Whether you’re expanding or starting from scratch, taking advantage of what credit has to offer will not only benefit your net income in the long term, but it can also give you peace of mind in knowing that everything is taken care of.
At E-Boost, we are ready to help! We facilitate financial solutions for small businesses across the US — if you are overwhelmed with trying to get approved for a small business loan, our financial consultants will aid you.
By offering funding as well as other financial resources, our platform makes use of technology and transcends barriers to uncover potential growth areas. By working with us, you’ll get to enjoy our world-class customer service, cutting-edge technology, and extensive partner network.
