There are a lot of reasons why bookkeeping and accounting are business essentials. Through proper financial management, you can track all the money coming in and out of your account. With all this data, you can calculate many details about your business finances, including your net income.
Net income may be a single detail in an income statement, but it means a lot for your business. Hence, you must know all about it.
In this blog post, we’ll dive deeper into the different methods you can use to calculate net income, why you should always be aware of this number, and what you can do after knowing your net income. Let’s go!
How To Calculate Net Income
The basic formula for calculating net income is Income - All Company Expenses. Though this formula is straightforward, what makes it challenging is the details you need to track, as expenses include the costs of goods sold, selling costs, operating and administrative expenses, asset depreciation, and tax payments. The good news is that methods are available to make your tracking and calculations easier and more accurate.
Automated Net Income Formulas
Bookkeeping and accounting have evolved from using Excel sheets to using automated software like QuickBooks, Xero, and Sage50 cloud. Although Excel sheets are still used today, it is more efficient to invest in software as they are less prone to errors.
A bookkeeping and accounting software automates data acquisition from channels like ecommerce platforms, payment gateways, banks, and other applications. With software, there’s no need for manual input which minimizes errors.
Software also calculates automatically through built-in formulas, unlike Excel sheets where bookkeepers or accountants still need to add formulas to get results. Though the formulas may be correct, any error in linking cells can make the process more complicated and error-prone.
Through a software’s dashboard, you can easily see updates about your net income and many details about your business finances. You can also customize reports and generate them in just a few clicks.
Delegated to Experts
You can also delegate net income calculations to experts. Many bookkeeping and accounting firms have experienced professionals to handle your account. You can skip the hassle of learning the ropes of using software and let them do it for you as they use the same reliable tools. You’ll also have more time to manage your business with the peace of mind that qualified professionals are handling your books and accounts.
Aside from calculating net income, trained bookkeepers and accountants can also generate essential accounting reports like balance sheets, income statements, and cash flow statements to calculate net income. They know how to calculate net income from a balance sheet and other reports efficiently.
With experts on board, your only tasks will be to check the accuracy of the details on the books, check reports, and use the data you get in decision-making for your company.
Reasons To Calculate Net Income
You already know that net income comes from deducting all your business expenses from your company’s income. Now, see the different reasons why you should always get the net income calculation correctly, and why you should give importance to this detail. What does net income signify, and what does it say about your business?
Visibility on Gross Income
In computing net income, you’ll primarily see your business’s gross income. You’ll know whether you are hitting your sales target or not. If you see positive numbers, you’ll know your strategies are working. You can identify the best practices, so you can keep on doing them. On the other hand, if you see that you are not hitting your sales goals, you can strategize to change the situation.
Knowledge of Operating Expenses and More
Part of the reason you are not getting the net income you are aiming for is high expenses. Look into the details of your expenses and pinpoint the culprit of your high expenditures. See whether there are ways to lower costs to increase net income.
Realize Company Profitability
The net income reflects profitability, so it must be every business owner’s goal to see positive numbers. Though it takes work to turn your business into a profitable one, the efforts are worth it because it is through profitability that you can ensure that your business thrives.
Data for Investors
Since net income reflects your company’s profitability, it is among the first things investors will look at. Investors help grow your business through their investment, but they will only do so when they see that your business can maintain a stable income. A stable income shows that when they invest in you, their investments will return and grow.
Calculate Shareholders’ Earnings
If your business has shareholders, you’ll get their share from the net income. This share is called the dividend. You can agree on how often to send dividends, but it is common practice to send out dividends twice a year. The higher the net income, the higher the amount you and your shareholders will get. You and the shareholders have the option to reinvest this money to fuel the business’s growth, or spend it outside the company.
Strategies To Spend Your Company’s Money Wisely
You’ve invested time, money, and effort to get the net income you’ve incurred, so it is just right to plan how you’ll spend it. To make the most of that money, these are the different things you can do.
- Grow your savings: You can save the money, so when the rainy days come and sales are low, you’ll have the money to manage expenses.
- Scale your business: You can reinvest your money to scale your company. There are many ways to do this, like improving your office, upgrading the tools you use for operations, or broadening the products you offer.
- Pay your debts: Debts, especially those with high-interest rates, can hurt your business, so be on top of them by paying on time. You can also pay them off completely if your income allows it.
- Reward yourself and your team: Give back to yourself, as you’ve been working hard to grow your business. You can do this by paying yourself. You can also give rewards to your team through bonuses and other incentives.
Get Assistance From Unloop
Running a business means a lot of tasks to think about, including monitoring your business finances and net income. Net income reflects your company’s profitability which investors look at. It is also what you need to check in order to determine whether your business plans are working or not. And, of course, your net income defines your business success.If you are looking for help in net income calculation or bookkeeping to track all of your income and expenses, you can partner with us! We at Unloop have a team of experts to handle your financial tracking. Contact us now so we can discuss the details of our services and offers with you.