The net income formula is a method finance leaders use to calculate their company’s total profit. That metric, also known as “net earnings” or “the bottom line,” illustrates the amount of profit a business has left after deducting expenses and taxes.
It’s an obvious number for any business to track, but getting it right means accounting for every detail of your finances. Is your ERP giving you an exact picture of your business’s net income with embedded finance solutions, or just a rough estimate full of errors? The answer may have a bigger impact than you think.
Here, you’ll find a full breakdown of the net income formula and a look at how SaaS CFOs can put it to use in their organizations.
How can you calculate your net income?
Since digital software delivery comes with minimal costs, many SaaS companies benefit from high gross margins. In this industry, gross margins above 75% are considered good, while margins below 70% can be a cause for concern.
Despite this, churn, operational expenses and other factors can easily cut into your business’s margins. Because of that, you’ll always want to keep a close eye on your company’s net income with an accurate formula.
Here’s how you can determine your business’s net income:
Net income = total revenue - total expenses (including COGS, operating expenses, interest and taxes)
Comparing net income to cash flow
Net income reflects the company’s accounting profit, revenue earned minus all incurred expenses, regardless of when cash is actually received or paid. It’s different from cash flow.
Net income is a measurement of the profit companies make in a given period.
Cash flow deals with the rate and volume of money coming in and going out.
Businesses can have positive cash flow but still be unprofitable in terms of net income, or vice versa. If your company uses the accrual accounting method, it recognizes expenses once they’re incurred and revenue once it’s earned. That means you could earn a large amount of sales revenue for an accounting period on paper but still experience negative cash flow if you don’t get paid until after that period ends.
Net income is also included at the very beginning of a company’s cash flow statements. In order to provide a better sense of actual cash position (as opposed to pure profitability), non-cash accrued expenses that are subtracted when calculating net income are added back into the cash flow statement.
How can you put the net income formula to use?
As a SaaS CFO, you can use the net income formula for:
Board reporting
When you’re reporting to your company’s board, you’ll need to present several reports – including an income statement. The precision and speed with which you track your net income can be an entry point for showcasing your finance architecture with key stakeholders.
Systems that are vertically integrated through your ERP offer benefits across the business, including real-time data, a single source of truth for all departments, automation capabilities and a highly scalable tech stack that indicates investment and growth readiness.
Forecasting
If your finance team uses a high-performing ERP like NetSuite, it may offer financial modeling features designed to help you see where your business’s finances could end up in the future. These forecasting features rely on data from your company, including information on its past performance in terms of net income.
Tools like native SuiteApps embed your finance data within your ERP to unlock automated reporting and forecasting with real-time data streams.
Valuation
While profitability is important, SaaS valuations often prioritize recurring revenue growth, gross margin, and churn metrics alongside net income. However, clean, credible net income reporting enhances investor confidence and can support higher multiples.
If your investors suspect your financial architecture isn’t producing accurate numbers for something as basic as net income, they’ll push back quickly – and forcefully. They’ll want to see an integrated finance strategy that scales effortlessly and optimizes operational efficiency.
The role automation plays in net income calculation
While net income isn’t hard to calculate, this isn’t something you and your finance team should have to handle manually. If they’re responsible for calculating this metric, they’ll spend time that they could have used on more strategic work – and eventually, these opportunity costs will add up. Plus, stitching your systems together with spreadsheets can quickly introduce errors and draw out monthly closes. These issues degrade your financial data and add to operational expenses.
While net income isn’t calculated by a single formula within your ERP, systems like NetSuite consolidate your accounting data into automated financial statements, enabling real-time visibility into profitability metrics like net income.
Customize NetSuite with native SuiteApps
By default, NetSuite is a powerful ERP option that can help you with financial metrics like the net income formula. Still, your company can get even more out of this software by making a few adjustments. Native SuiteApps add powerful new ERP-embedded features to NetSuite without forcing your finance team to get familiar with a different interface.
So, what SuiteApps should your finance team use? If you’re exploring your options, just know you can’t go wrong with Zone & Co’s applications. Adopting SuiteApps like ZoneBilling, ZonePayroll and ZoneApprovals can give you an 80%+ faster billing process, access to more than 90 built-in reports and the ability to handle hundreds of approvals in bulk. When you’re ready to take the first step towards using Zone’s SuiteApps, get started by scheduling a demo!
“Without ZoneBilling, we would not have been able to support our customer growth without significant back office effort and a high chance of failure.” – Blair Woodbury, CFO at Devoli