Net income

Definition: The money that a business has left over, measured at the end  of a quarter (ie, three months) or year, after paying all the expenses, costs and taxes required to run the business. It is the final figure shown on a company’s Income statement, and is also known as Net profit and Earnings.Example: TLV Corp. has just completed the second quarter of the year (ie, April, May and June). It took in (had Sales of) $52 million. The expenses paid to run the business such as rent, employee salaries, advertising, product development, insurance and shipping, were $40 million. Because $52 million – $12 million represents $12 million in profit, the government takes some of it as income taxes. Here we’ll assume the government will take 25% of the profit, or $3 million. Therefore, TLV’s Net income is $52 million – $40 million – $3 million, or $9 million.

Investeach explains: The term “net” is used to indicate that a number has had something subtracted from it. Here, what has been subtracted or “netted out” from the original sales amount are the expenses and taxes.

The ability of a company to make profits is why people start businesses in the first place! Therefore, a company that has lots of sales but also very high expenses (and which achieves little or no net income) is probably not worth running.

It is possible that the expenses and costs of running a business are higher than the sales it achieves, resulting in negative net income. This is also referred to as a Net loss. In such a case, to make the loss clear to readers of income statements, the dollar amount will be shown with a negative sign in front of it or parentheses around the number: A loss of $10,000 will appear as -$10,000 or ($10,000). It may also be shown in the color red, which gave rise to the habit of describing company losing money as being “in the red”.

Let’s look for a moment at taxes. In the interest of fairness, the government takes a piece of the profits companies make. If there’s no profit, there’s no income tax. The Net Income figure is after taxes. The number that is calculated before taxes come out ($12 million in our example above) is known as Net Income Before Taxes or Earnings Before Taxes (EBT).

One of the biggest expenses companies have is their employees. When the economy is doing poorly and sales are down, companies often resort to laying off their employees to lower their expenses and continue achieving substantial net income. This in turn keeps the stock price from falling. The problem is that if all employers act this way, too many people will be out of work and not able to spend money with businesses they are used to supporting. A vicious cycle can be created where more layoffs lead to lower sales, which lead to more layoffs.

Riddle me this:

1. Over what periods of time do companies add up and report their profits?
2. On what financial statement is Net income shown?
3. What does the term “net” mean?
4. By what other names does net income go?
5. What does a company have when its expenses are higher than its sales?
6. What does it mean for a company to be “in the red”?
7. How does the government demonstrate fairness with regard to taxing corporations?
8. Is the Net income figure companies show before or after income tax has been subtracted?
9. What can companies do in recessions in order to maintain substantial profits even though their sales may be falling?
10. Explain the “vicious cycle” that mass layoffs can create.

Also known as: Net Profit, Earnings