How to calculate the net income formula

Net income is one of the simplest yet most powerful numbers on your income statement. It’s the “bottom line” that shows what’s left after all expenses are paid. For startup founders and finance leads, knowing how to calculate net income is more than an accounting exercise. Net income is key to understanding whether your business is sustainable, scalable, and ready for outside capital.

In this guide, we’ll demystify the net income formula, show how it differs from other profit metrics, walk through an example, and explain why it matters so much for founders of early-stage startups.

Net income is your company’s total profit after subtracting all expenses, including operating costs, taxes, interest, and depreciation.

It’s often calculated on a monthly, quarterly, or annual basis, depending on your reporting needs:

• A monthly net income snapshot helps track burn rate and cash runway.
• Quarterly net income is standard for investor reporting.
• Annual net income is essential for taxes and long-term planning.

On an income statement, net income appears at the very bottom, which is why it’s often called the “bottom line.”

Net income vs. gross profit vs. operating income

It’s easy to confuse net income with other profit metrics. Different profit metrics capture different stages of profitability:

• Gross profit: Revenue minus cost of goods sold (COGS). This tells you how profitable your product or service is before overhead.
• Operating income: Operating income is gross profit minus operating expenses, like payroll, rent, and software. This shows your company’s profit from operations, also known as earnings before interest and taxes (EBIT)
• Net income: Net income is operating income minus all other expenses, including taxes and interest. This is your actual profit.

Think of it as a funnel: Revenue comes in at the top, expenses are subtracted layer by layer, and net income is what comes out at the bottom.

If you want to get more comfortable reading these numbers in context, check out our guide on how to analyze a profit and loss statement.

Financial formulas, at a glance

Understanding the net income formula is about more than crunching numbers. It shows the full story of your business. 

At its simplest, the formula for net income is:

Net Income = Revenue – Expenses

This quick snapshot works if you just want to know whether your business is profitable. But, for more detailed accounting purposes, it’s usually helpful to break it down further:

Net Income = Total Revenue – COGS – Operating Expenses – Taxes – Interest

This version of the net income formula shows how net income incorporates all costs. If you’re pulling numbers from an income statement, you’ll start at the top with revenue and subtract line by line until you reach the bottom.

Example: A SaaS startup makes $100,000 in revenue. Here are the steps for calculating the company’s net income:

1. After subtracting $20,000 in hosting (COGS) from revenue, it has $80,000 gross profit.
2. Subtracting $50,000 in salaries (operating expenses) leaves $30,000 operating income.
3. After subtracting $5,000 in taxes and interest, the final net income is $25,000.

Want to try this exercise with your own numbers? Mercury offers free income statement templates for consultants and agencies, SaaS companies, and ecommerce brands.

Variations founders should know

Profitability can be measured in different ways depending on context. Investors, lenders, or accountants may use variations of the formula to highlight specific aspects of performance:

• Net operating income (NOI): The formula for NOI is revenue minus operating expenses. NOI excludes taxes, interest, and non-operating items. It’s common in real estate and lending, and also useful for startups — especially when comparing “core” profitability across periods.
• Earnings Before Interest and Taxes (EBIT):EBIT is equivalent to operating income. It shows profit from operations before financing decisions and tax structures, making it easier to compare companies across geographies or capital structures.
• Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) ():EBITDA strips out non-cash charges, like depreciation. Venture capital and private equity firms often rely on EBITDA because it provides a cleaner view of recurring profitability.

The key difference between net income and net operating income is scope: NOI ignores financing and taxes, but net income includes them.

Formulas might seem easy on paper. The real test is applying them. Let’s walk through a design agency’s quarterly numbers, step by step. 

Here's the quarterly snapshot we’ll use:

• Revenue: $200,000
• COGS (contractors, design software): $60,000
• Operating expenses (payroll, rent, marketing): $100,000
• Interest on a small business loan: $5,000
• Taxes: $7,000

As a reminder, here’s the accounting-preferred net income formula:
Net Income = Total Revenue – COGS – Operating Expenses – Taxes – Interest

Now, let’s apply it:

1. Subtract COGS from revenue: $200,000 – $60,000 = $140,000 gross profit
2. Subtract operating expenses: $140,000 – $100,000 = $40,000 operating income (EBIT)
3. Subtract interest and taxes: $40,000 – $5,000 – $7,000 = $28,000 net income

In this case, the design agency earned $28,000 in profit for the quarter. That’s the figure investors, lenders, and founders will zero in on.

For early-stage business operators, calculating net income isn’t just a reporting exercise. It’s a decision-making tool that helps you stay in control of your business, measure performance, and plan with confidence. It shows how much profit can be reinvested into growth, and it’s one of the numbers investors look at first.

Net income also creates a common language between founders, investors, and finance teams. When you understand net income, you can explain your business performance clearly, defend your assumptions, and spot issues before they become problems. That clarity builds trust and gives you more leverage in conversations about funding and strategy.

Your company’s net income can help:

• Inform fundraising and valuation: Investors use net income (and related measures, like EBITDA) to benchmark profitability and growth potential.
• Determine taxes and reinvestment: Net income determines your tax bill and signals how much can be reinvested into hiring, product development, or marketing.
• Support runway and cash flow planning: Knowing your net income helps with tracking burn rate and runway. Even if your company isn’t profitable yet, projecting net income helps you anticipate capital needs.
• Signal business health: A steady net income trend shows that your business is on the path to sustainability. Volatility may point to cost-control issues or seasonal trends.

In short, net income is the clearest signal of whether your business model is working and how much room you have to grow.

Calculating net income can get messy when you’re managing multiple revenue streams and expense categories. The net income formula gives you a clear picture of whether your business is truly profitable once every cost is accounted for. Getting this calculation right means you can make sharper decisions around runway, reinvestment, and growth. And having the right financial tools simplifies the process of calculating net income in the first place. 

With Mercury, you get clean financial data, smart spend tracking, and accurate net income snapshots. By giving you real-time visibility into revenue, expenses, and cash flow, Mercury’s tools also help startups reduce errors and speed up reporting, so you can move forward with clarity and confidence.

Ready to see your net income with fewer headaches? Apply for an account with Mercury to start simplifying your financial workflows.