Net income is how much money your business is left with after you deduct fixed costs, variable costs and tax. Net income shows whether your business is profitable.
The opposite of net income is gross income, which is how much your business made before you deduct any costs.
It doesn’t matter if the gross income is a high and healthy number: If the net income is a low number—or even a negative number—it means that the business is operating at a loss, and that you’re spending more money than you’re earning.
Why net income is important
As mentioned, net income shows whether you’re running a successful business or not.
You should keep an eye on your net income, as it’s your bottom line. If it changes for the worse, you should look into what’s changed: Have your suppliers increased their prices? Did the interest on your loan go up? Are you losing clients?
Once you know what the issue is you can take the appropriate steps to fix the issue.
Net income is included on the income statement, which is one of three important financial statements that businesses have to submit as part of their annual report.
Tips to cut costs
Are you looking to improve your net income? Here are some useful tips on how to cut costs in your business and improve your bottom line:
- If you have high costs, it’s worth reaching out to suppliers to see if you can negotiate deals, or consider switching to cheaper suppliers.
- You can also ask the bank if they can give you a lower interest rate or switch to another bank.
- You can also cut costs by looking for cheaper accounting software or start using free invoice software.
Consider operating with a just in time (JIT) inventory system, where you only produce goods when orders come in. This will save you money on storage, and will avoid tying up a lot of your money in inventory.