What is net income?

Net income is your business's total profit after all expenses, taxes, and costs are subtracted from revenue. For professional service firms, net income is calculated as Total Revenue minus Cost of Services (payroll, contractors) minus Operating Expenses (rent, software, marketing) minus Interest and Taxes. Also called "net profit" or "bottom line," net income appears on the income statement and represents what the business actually earned. A consulting firm with $2M revenue, $1.2M in costs, and $600,000 in expenses has $200,000 net income (10% net margin).

Key characteristics of net income

• Appears as final line on income statement (P&L)

• Calculated as: Revenue - COGS - Operating Expenses - Interest - Taxes

• Different from cash flow: can be profitable but cash-negative

• Flows to balance sheet: adds to retained earnings in equity section

• Industry benchmarks: Consulting (15-25%), Creative agencies (10-20%), IT services (12-18%)

Why net income matters for service firms

Net income measures business sustainability and owner compensation potential. A firm generating $300,000 annual net income can support $250,000 in owner distributions plus $50,000 retained for growth. Investors and lenders evaluate net income to assess repayment capacity and return potential. Net income trends reveal business health: consistent 15% margins indicate strong pricing and cost control; declining margins from 20% to 8% signal pricing pressure or cost escalation requiring intervention. Net income also determines tax liability: S-Corps and partnerships pay tax on net income regardless of cash distributions.

Example: Annual net income calculation for a consulting firm

          Revenue:

• Consulting services: $2,400,000

• Training & workshops: $180,000

• Total revenue: $2,580,000
  
  Cost of services:

• Employee salaries: $1,250,000

• Contractor payments: $420,000

• Total COGS: $1,670,000

• Gross profit: $910,000 (35.3% gross margin)
  
  Operating expenses:

• Office & facilities: $145,000

• Marketing & sales: $120,000

• Software & technology: $85,000

• Professional services: $62,000

• Insurance & admin: $48,000

• Total operating expenses: $460,000

• Operating income: $450,000

• Interest expense: $18,000

• Income before tax: $432,000

• Income tax: $0 (S-Corp, pass-through)

• Net income: $432,000 (16.7% net margin)

• Available for: Owner distributions, retained earnings, growth investments