The third level of business profit is Net Income. It is the bottom-line number reported on the P&L Statement, a “lagging number,” generated after every expense has been deducted from Net Sales.
Overview
In any accounting period, Net Income is the end financial result. Net Income is referred to as the Bottom Line of the P&L Statement; after all, expenses are deducted from net revenues earned during that same period. It is the only number that transfers from your P&L Statement to your Balance Sheet.
Net Income represents your business’s profit after employees, suppliers, lenders, and the government have all been paid—the amount left over goes to the business owner(s) in return for the capital they put at risk to produce this income. Net Income is also called earnings, net earnings, or net profit. When it’s a negative number that is typically referred to as the Net Loss that establishes how much was lost in the reported accounting period.
Net Income is the owners’ return from operations representing either an increase or decrease in the value of their business investment based on the financial results reported on their P&L Statement. The goal is to hold onto more than you spend on each dollar sold. Do this, and you are earning profits. If the business is operating at a loss, this number represents excess business spending in that accounting period. A Net Loss represents the amount of money the business owners have to put back into the business to cover the overspend made to generate sales.
Net Income is the hardest number to impact given its high reliance on the results of sales and operations reflected in Gross Profit and business admin that shapes Operating Income. Again, the most business-sustaining method to increase the bottom line is to increase Gross Profit while not wasting money on overhead.
The other way to increase Net Income is through Nonoperating Income, also referred to as Other Income, representing any inflow of monies from earnings or payments received that is not directly attributable to the company’s core business operations. Nonoperating Income usually does not occur continuously, making it next to impossible to rely on as a lever for increasing Net Income.
If you are recording your business transactions timely and monitoring your KRIs, you should never be surprised by whether your Net Income will be up or below your goal. Should you be tracking to miss your Net Income target, then what’s driving the miss is the #1 action you must take to realize your Net Income goal.