Net profit and bottom line are two terms frequently used by accounting professionals and business owners. But what do they really mean? Follow along as we explain each term.
As a business owner, one of your main goals is to make money. There are many things you can do to help your business achieve this, from creating a business budget to using various accounting ratios.
But how do you determine the success of your business? By calculating your net income or net profit – the best indicator to determine the real success of your business.
What is net income?
In order to understand what net income is, you also need to understand these accounting terms:
- Accounting cycle: Understanding the accounting cycle helps ensure that your financial statements are accurate. Whether it’s calculating profit versus revenue or reconciling your bank statement, it’s all part of the accounting cycle.
- Revenue: Revenue is money received from providing services or selling products to customers. Although many people use earnings and earnings interchangeably, they are two very different things. When tracking revenue, be sure to use the revenue recognition principle, which explains exactly how and when revenue should be recognized.
- Expenses: Expenses are things that are paid for by your business. Expenses include employee payroll, rent, and day-to-day expenses incurred by your business, such as printing, postage, utilities, and office supplies.
- Cost of Goods Sold: The cost of goods sold is all the costs involved in creating a product or service. If you provide consulting services, your cost of goods sold would include all labor costs, payroll taxes, and related benefits paid to employees providing that service. If you sell products, your cost of goods sold includes the cost of the product you are selling. For example, if you buy 100 leather wallets at $5 each from the manufacturer and resell them at $15 each, the cost of goods sold is $500.
- Depreciation charge: Depreciation expense is used to properly allocate the cost of an asset over its useful life, indicating the part of the asset that has been used or consumed during that period.
- Taxes: Businesses have to pay taxes like all of us. Some of the taxes a business may have to pay include income tax, sales tax, property tax, self-employment tax, and payroll taxes. All taxes paid by your business will need to be included in your total expenses when calculating net income.
Net income is calculated the same way as pre-tax income, except you also include your taxes in the calculation. Here is the formula for calculating net income:
Net Income = Total Income – Total Expenses
Net income vs. net profit: is there a difference?
Is there a difference between net income and net profit? What about net profit versus net profit? No, there is no difference. Most accountants and CPAs use the three terms interchangeably because all three mean the same thing, which is the total cash left after subtracting all business expenses, which includes taxes, depreciation, and the interest expense of the total income received.
What does net income mean for your business?
“Just give me the end result.” We’ve all heard this from bank representatives, investors, and even CEOs. That’s what net income is – the bottom line of a company’s income statement. But what does this number mean for you and your business? Here are a few things net income does:
It provides a good indicator of business success
Net income indicates that a business is making money. If expenses and taxes exceeded revenues, the business would suffer a net loss. Net income, unlike gross income, shows you how much money you have left after all your expenses have been paid. provide you with useful information on the health of your business.
In order to track the net income of your business, it is important that you can track income and expenses correctly.
It is a basis for comparing performance over years
Year-over-year net income comparisons can provide you and your accountant with a way to track your business’ growth and financial health over a period of time.
For example, if your net income is flat or declining over a three to five year period, you may need to find ways to reduce expenses or increase revenue, while a steep slope shows that your business is growing. in a healthy way year after year. year.
It provides investors with the financial data they need
Net income is one of the first things investors and financial institutions will look at. A good net income indicates that a business is financially stable and has enough money left over to pay its bills. It also provides good insight into the likelihood of a business succeeding.
Best Accounting Software to Calculate Net Income and Net Profit
While most accounting software applications provide you with net income and/or net profit totals, the more comprehensive your reporting options are in a software application, the better.
Here are three small business accounting software apps that offer excellent reporting capabilities, including comprehensive financial statement reports.
1. QuickBooks Desktop
QuickBooks Desktop is an on-premises app that includes top-notch reporting options for growing small businesses.
QuickBooks Desktop Pro offers over 100 standard reports, while Premium and Enterprise plans include over 150 industry-specific report options. All QuickBooks Desktop reports can be fully customized or exported to Microsoft Excel for further customization.
QuickBooks Desktop starts at $299.95 for the Pro plan, which supports up to three users, with the Premier plan running at $449.95 per year, for up to five users. For growing businesses, the Enterprise supports up to 30 users and costs $849.10 per year.
2. Sage 50cloud Accounting
Sage 50Cloud Accounting is a hybrid application, designed to be installed on-premises, but offering online access through Microsoft 365. Sage 50cloud Accounting offers robust reporting options for small and medium businesses.
Sage 50cloud Accounting reporting options include full financial statements, as well as corporate reports. Optional intelligence reports are also available. All reports are fully customizable and can be exported to Excel for further customization if desired.
Sage 50cloud Accounting starts at $278.98 per year for a single-user system, while Premium costs $431.95 per year for five users. For growing businesses that need a more robust system, Sage Quantum Accounting supports up to 40 users, with pricing available on request.
3. Account Edge Pro
AccountEdge Pro is an on-premise application that offers great reporting options for growing small businesses. Online access options are also offered with AccountEdge Pro.
Along with good account reports, AccountEdge Pro also offers comprehensive transaction logs and financial statements, including a trial balance and profit and loss statement. All AccoundEdge Pro reports can be customized or exported to Excel for further customization.
AccountEdge Pro has a one-time fee of $149 for the basic plan, while the Pro plan has a one-time fee of $399. If you want 24/7 online access, AccountEdge offers Priority Zoom, with a monthly fee of $50 per month.
Knowing your net income is essential
Knowing your net income is one of the most important markers of business success. While other numbers such as gross income and gross profit are also important for different reasons, net income is the bottom line that investors and banks want to see.
The easiest way to calculate your net income is to use accounting software. Although the number can be calculated manually, using accounting software can accurately track income and expenses, providing you with a net income figure you can trust.
If you’re still looking for accounting software, check out the products above or check out The Ascent’s accounting software reviews.