Net income is what remains after every cost is subtracted from revenue: cost of goods sold, operating expenses, depreciation, interest and taxes. It is the bottom line of your profit and loss statement. Positive net income means you made a profit on paper in that period, not that your cash grew.
Net income determines your tax bill and, in a company with shareholders, what can be paid out. It sits at the very bottom of the profit and loss statement.
Worked example. Revenue is 900,000 euros. COGS of 360,000 euros leaves gross profit of 540,000 euros. Operating expenses of 420,000 euros leave 120,000 euros. Depreciation of 45,000 euros gives EBIT of 75,000 euros. Interest of 15,000 euros gives a pre-tax profit of 60,000 euros. At a tax rate of 25 percent you pay 15,000 euros, so net income is 45,000 euros. That is a net margin of 5 percent.
The error that hurts most is treating net income as money you can take out. It is not the same as cash. In the example above, if customers still owe you 70,000 euros at year end and you bought a 50,000 euro machine during the year, your bank balance in December can be lower than it was in January, despite 45,000 euros of net income. Profit and cash follow different clocks.
A second error is leaving the founder salary out of the plan. If you run a company and pay yourself, that salary is an operating expense and it reduces net income. Leave it out to make the plan look profitable and a bank will add it back, which costs you credibility. If you are a sole trader, your pay is not a cost at all; the profit is your income. Say clearly which case applies.
Net income closes each planned year in a Foundor financial plan.
