Formula to Estimate your business’ profitability in 2023
As a small business owner, knowing how much your business is earning is important. Two ways to look at your earnings are by calculating your net income and calculating your operating net income.
Download Our Free Brochure →Net Income is the amount of money your business makes after all expenses, including taxes. This number shows your business’s profitability as a whole.
Operating Net Income is a little different, it is the amount of money your business makes minus operational expenses, without consideration of other income such as interest and sales of fixed assets. This number tells you how profitable core operations are.
Both of these numbers are important and provide you with the information you need about your business to make informed decisions.
Let’s start with Net Income
Net Income is the earnings of a company after all expenses are paid. This money can be used in a variety of ways including to pay shareholders, pay off debts, or even set aside to be saved or invested back into the business. You can look at your net income over any period, such as monthly, quarterly, or yearly.
Net income may also be referred to as net earnings or net profit. There is a specific formula used to calculate a business’s net income.
Net Income = Revenue – Cost of Goods Sold – Expenses
However, if you want to look at it more simply, the formula can be written as:
Net Income = Total Revenues – Total Expenses
Download Our Free Brochure →When calculating your Net Income, keep in mind the result could be positive or negative. If your business is spending more than it is earning, you will have a net loss for the period.
Now that we know the formula, let’s put it to use.
Okay, you are ready to figure out your business’s net income/loss for the month. First, you must have your financial documents handy so you can look up the numbers you need. Imagine your revenues and expenses are as follows:
| Total Sales: | $15,000 |
| Cost of Goods Sold (COGs): | $7,500 |
| Expenses: | |
| Rent and Utilities: | $2,500 |
| Marketing: | $500 |
| Salaries: | $2,000 |
| Administrative: | $200 |
| Interest: | $300 |
To find out whether you had net earnings or a net loss for the month, we take our numbers and simply plug them into the formula. Let’s first find out the total expenses.
| Total Expenses = | Rent & Utilities + Marketing + Salaries + Administrative costs + Interest Expense |
| = | $2,500 + $500 + $2,000 + $200 + $300 |
| Total Expenses = | $5,500 |
Now let’s figure out our net income/loss:
| Net Income/Loss = | Revenue – Cost of Goods Sold – Expenses |
| = | ($15,000) – ($7,500) – ($5,500) |
| Net Income = | $2,000 |
In this example, the net income for the month is $2,000.
Let’s look at Operating Net Income now
Operating Income is similar to net income, but it gives you a clearer picture of how profitable your core business processes are. This can also be calculated during any given period to give you a peak at how your business is performing.
The formula for calculating operating net income is:
Operating Net Income = Gross Income – Operating Expenses
Or another way to look at it is:
Operating Net Income = Net Income + Interest Expenses
Let’s try this formula using our example from above.
If we want to calculate the operating net income for the same month as in the above example, we know that the net income for the month was $2,000. We also know from our documentation that the interest expense was $300.
So, we have everything we need, let’s evaluate the equation.
| Operating Net Income = | Net Income + Interest Expenses + Taxes |
| = | $2,000 + $300 |
| Operating Net Income = | $2,300 |
In this example, the operating net income for the month is $2,300.
Financial statements make it simple
So, you know how to calculate your net earnings/loss and your operating net earnings/loss, but putting the numbers into the formula is not the hard part. If you had to dig through all of your finances every time you wanted to make any of these calculations, you may get frustrated. These calculations can be executed with ease if your finances are organized and up-to-date.
If you have a bookkeeper, you won’t even need to deal with calculating anything to find out these numbers, they would be included on your income statement. Your bookkeeper will provide you with financial statements, including the income statement, every month. They can also prepare an income statement for other periods, such as quarterly if that is what your business needs.
