What is Net income? Definition, Formula & Benchmarks

What is net income?

Net income is the bottom line, what's left after subtracting every expense from revenue, including COGS, operating expenses, interest, and taxes. It's the truest measure of whether a company made or lost money in a period. Positive net income means profit; negative means a loss. It then flows into retained earnings on the balance sheet.

Formula

Net Income = Revenue − COGS − Operating Expenses − Interest − Taxes

Revenuetotal sales for the period
COGSdirect costs of what you sold
Operating Expensesoverhead like salaries, rent, and marketing
Interestthe cost of any debt
Taxesincome taxes owed on profit

Worked example

A company with $5M revenue, $1.5M COGS, $2.8M operating expenses, $100K interest, and $150K taxes has net income of $450K.

Why it matters for fast-growing companies

Net income is the number that decides whether you're building a business or a hobby. It drives taxes owed, retained earnings, and how investors and lenders judge you. But it can be distorted by one-time items and non-cash charges, which is why founders also watch EBITDA and cash flow alongside it.

Frequently asked questions

Is net income the same as cash flow?+

No, and confusing the two is dangerous. Net income is an accounting figure that includes non-cash items like depreciation and revenue you've booked but not yet collected. A company can show positive net income while running out of cash, or the reverse. Always read net income alongside a cash flow statement.

What's the difference between net income and EBITDA?+

EBITDA adds back interest, taxes, depreciation, and amortization to approximate operating profitability before financing and accounting choices. Net income leaves all of those in. EBITDA helps compare operating performance across companies, but net income is what you actually keep after every real cost, including taxes and interest.

Net income