Net income is the total amount of profits made by a company after all costs and expenses are deducted. This includes salary and wages, costs of manufacturing goods, operating expenses, as well as taxes and interests. It is listed in a company’s earnings report and is also another indicator of its profitability in the markets.
For organisations, net income usually indicates how efficient they are at managing their earnings and expenses. In this case, net income is also known as the ‘bottom line’, as they are positioned at the bottom of a company’s income statement.
Net income helps business owners and external analysts to assess whether the business is making enough money. It also allows them to check the sustainability and proficiency of the organisation in terms of profit.
The net income of a business also provides insight to lending institutions, as it helps them estimate whether a business can pay off potential loans and debts.
An organisation that has a high net income tends to be viewed positively by shareholders, especially if they pay dividends.
Gross income refers to the total earnings made by a business entity, before expenses such as taxes or deductions are accounted for. Essentially, gross income equates to its total sales over a period of time. Gross income is important because this is one of the only ways to track sales over time and find the average size of sales and seasonality.
Net income, on the other hand, refers to the earnings made after all expenses and deductions have been subtracted from the total income. This is important in measuring the profitability of a business because it also accounts for all costs incurred. Determining net income also allows businesses to calculate their profit margin (their net income as a percentage of their gross revenue), which indicates how much the company makes in profit for every sale.
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