What is net income?

Net income is the difference between revenues and expenses.

Revenues – expenses = net income

We use net income to measure profitability.  (Net income and net profit are synonyms.)   A good basic goal for your business should be to maximize net income, the “bottom line.”

Maximize your net income by increasing the difference between your revenues and expenses.  Three ways to do this:

  1. Raise your prices.
  2. Reduce your costs.
  3. Increase your sales volume.
Don’t confuse net income with cash flow.  You need both and one doesn’t necessarily imply the other.  For example, if you pay for an expensive asset, that will hurt your cash flow, but not affect your profit – it might even improve your profit.

Furthermore, you cannot judge income just by looking at the balance in your bank account.  Keep accurate books and records so that you can measure your profitability (following the above formula), and try out different strategies to maximize it.

About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

8 Responses to “What is net income?”

  1. which is more manipulated ? net income or cash income

    • Thanks for the question! Net income is more commonly manipulated. Most managers don’t seem to think that anyone is looking at operating cash flow, so the managers focus on net income.

      Charles Mulford and Eugene Comiskey discuss this in their book, “The Financial Numbers Game,” published by J. Wiley.

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