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Josh Aharonoff, CPA

Fractional CFO for Startups | Founder & CEO at Mighty Digits | Follow Your CFO Guy for Finance &
Accounting tips!

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Josh Aharonoff, CPA • Following

Fractional CFO for Startups | Founder & CEO at Mighty Digits | Follow Your CFO …
3w •

Working Backwards from Net Income ⏬

Net Income is the grand daddy profitability metric on your P&L

But how is it calculated? and what does it represent?

Let’s dive in…

➡️What is Net Income?

Net Income is your bottom line “income”, after “netting” our all of your costs in your
profit & loss

It in essence is the sum of all of your INCOME accounts, minus the sum of all of your
EXPENSE accounts

and is just 1 of 4 profitability metrics

➡️What are other profitability metrics on the P&L?

There are 4:

1️⃣Gross Profit

Formula → Revenue - COGS

What is tells you → the amount of profits that are left over after each sale

2️⃣Net Operating Income

Formula → Gross Profit - Operating Expenses

What it tells you → the amount of profits that are left over from your sales after you
subtract out the costs to operate your business

3️⃣Net Other Income

Formula → Other Income - Other Expenses

What it tells you → the net income from the non core activities of your business

4️⃣Net Income

Formula → Net Operating Income + Net Other Income

What it tells you → what’s left over each period in the form of profits after subtracting
out all of your expenses from all of your income

➡️How does Net Income Get Presented?

Often times you’ll see Net Income presented in 1 of 2 ways:

1️⃣Net Income BEFORE taxes → this is your net profits BEFORE accounting for income
taxes on those profits

2️⃣Net Income AFTER taxes → this is your net profits AFTER subtracting our your
income taxes

➡️What other statements does your Net Income affect?

Both the Balance Sheet and Statement of Cash Flows

How it affects the Balance Sheet → By going into an account called “Retained
Earnings”

How it affects the Statement of Cash Flows → it’s the first line that gets shown on the
indirect method, and is an operating activity

That’s my take on Net Income - a VERY important metric to keep track of

Got anything to add?

Let us know by joining in on the conversation in the comments below 👇

PS: If you enjoyed this post, you’ll LOVE my upcoming self paced video course on Intro
to Accounting course where we’ll cover this topic, and so much more. Check the
comments below & my profile for more details

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Josh Aharonoff, CPA Author 3w

Fractional CFO for Startups | Founder & CEO at Mighty Digits | Follow Your CFO
Guy for Finance & Accounting tips!

If you enjoyed this post, you'll LOVE my upcoming self paced video course
where I'll teach you the fundamentals of accounting

You can get it for 50% off with coupon code LI50ACT before 6/30:
https://www.yourcfoguy.com/intro-to-accounting

Like · 5 Reply

Nicolas Boucher (Finance, Controlling, FPA) • 2nd 3w

I teach Finance professionals how to use ChatGPT and how to move to FP&A.
Follow me for Finance, Accounting and FP&A insights.

I would love if my net income can be bigger than my gross profit! What is
your secret to reach that?