No matter how much you love what your business is, you are only doing this to exist in this world. When running a business, even if it is a small store, you must pay other employees, as well as taxes and other rents. To see where your business is going, you must keep detailed records. If you are a merchandiser, you must buy and sell products. You cannot keep a full record in your mind. You have to calculate every record. In the income statement, you can calculate the record by a process called net income. How do you compute Net Income for a Merchandiser? Read this blog to get the answer to this question.
Introduction to net income
Net income is one of the essential metrics for merchandisers. Net income is the profit made by a company during an accounting period. In other words, it is the merchandiser’s expenses after deducting all revenue. In the income statement, it is referred to as the bottom line. It is also known as net sales.
- Net income talks about the health of a business.
- It gives the bottom line of the trade.
- Also tells the business’s accounting period.
Net Income vs. Gross Income
Net income gives you an overall idea of your business. It shows you the overall health of your business. As we told you previously, net income is the income statement’s bottom line. There is a gross income, the overall income, before all the taxes and other deductions.
If there is a huge difference in net income and gross income, it will be a warning sign for your business. Net income varies from business to business.
How do you compute net income for a merchandiser?
Today we will discuss how to compute a merchandiser’s net income comprehensively.
It is important to note that net income analysis is not only for merchandisers but also investors and individuals. We can examine individuals’ gross income fluctuations.
Ways to compute net income
There are two methods to compute net income. One is a complete method, and the other is simple.
1. Simple method
The simple method is to subtract gross income from expenses. Gross income refers to your income before paying all the taxes and other deductions.
Gross income – Expenses = net income
2. Complete method
For a complete method, you must calculate the total revenue, cost of goods sold, and expenses. You will now begin with total revenue. Subtract revenue from the cost of goods sold and then from total expenses.
Net income = Total revenue – Cost of goods sold – Interest of debts – Taxes – Total expenses
In this blog, you will learn how to compute net income completely. To compute net income, you can apply this formula, which is the most comprehensive and complete method.
Before analyzing the net income, first, you must know the terms like revenue, cost of goods sold, tax, interest on debts, and total expenses.
If you want to know how much money you make after selling your products and services, You should calculate the total revenue.
Total revenue is the payment obtained by selling its products and services. Total revenue is also known as Gross Revenue.
If a company or store, for example, sells 100 bottles at $50 each, the total revenue is $5,000.
Costs of Goods Sold
The cost of goods sold is the sum of the amounts spent on raw materials and labor. It can be calculated by adding raw material and labor expenses. However, it will not include fixed expenses such as rent, utilities, and salaries. But we can add certain types of labor costs.
It is important to measure. It helps to deduct all these costs. However, it measures costs during business when you sell or resell them.
It includes the following expenses:
- Cost of goods sold
- Salaries, commissions, and labor
- Rents and utilities.
Payable interest and bank charges.
There are two permanent things in life: death and taxes. To live, you have to pay different taxes. These taxes mainly depend on your income and the home you live in. It is very important in the income statement. Net income is calculated by subtracting all taxes. There are the following taxes you have to pay:
- Income taxes
- Estimated taxes
- Self-employment taxes
- Employment taxes
- Excise taxes
Interest of Debts
To understand the concept of interest on the debt. You will first need to understand what interest is.
Interest is any form of money that is given with debt. Every bank gives loans based on interest. This concept is based only on whether they will return the money in time. To compensate for all risk, banks and companies use debt interest to avoid late payments.
It is usually the agreement annually. You have to pay interest annually.
To understand all the concepts, you can now easily calculate net income by putting together the formula and your corresponding values. Keep in mind that these values are only for examples and concepts. It is not the value of any company.
Net income in the income statement for a merchandiser:
- Total revenue: $6000
- Cost of goods sold: $2000
- Gross profit: $3000
- Salary: $300
- Rent: $400
- Utilities: $300
- Depreciation: $200
- Total operating expenses: $1200
Interest expenses: $200
- Total revenue: $6000
- Cost of goods sold: $2500
- Expenses: $1200
- Debt payment (Interest expenses): $200
- Tax: $500
Now that all the values are given out, it is comprehensive to compute net income.
Put that formula that we gave out.
Net income = Total revenue – costs of goods sold – interest of debts – Taxes – total expenses
= $6000 – $2500 – $200 – $500 – 1200
Net income = $1600
Importance of calculating net income for a merchandiser
Benefits of computing the net income
Determines Financial Health
As it is important to collect data on rents, salaries, taxes, etc., it is also important to have data on the health of your business. You cannot keep all records in your mind. Net income is an easy method to compute all the data. However, it tells you all about the financial health of your business. If your gross income is higher than your net income, it will be a warning sign for you to take note of it.
Easy to calculate
The net income formula is stated in the future. We can also use the simple method to calculate net income. It would be best if you subtracted gross income from total expenses. It would help if you calculated an accurate value.
It is a problem-solving technique in which your net income needs to meet expectations. You can briefly analyze what is causing problems in your net income. However, you can compensate for these problems by solving them. You can achieve economic growth in this manner.
Aids in Goal Setting
When you learn to improve your net income, you will have no curiosity to set goals to gain more. Goals are the one thing if you set them at a special price. You can achieve it by maintaining.
Helps in assisting with upcoming taxes
Generally, every country’s rule is that the more you earn, the more you have to pay taxes. Net income informs you of the overall predictions about the taxes you have to pay in upcoming years. It also helps you take better responsibility.
Provides Advanced Analytics
Your net income can provide various data information, e.g., your economic condition and future process concerns. It allows you to do a complete analysis and obtains complete operational data.
Helps in taking bank loans
When you apply for a loan at a bank, they review your net income. The net income can assist banks in analyzing the overall health of your business, which will help them make a loan to you.
When you learn to improve your net income, you will have the curiosity to set goals to gain more. Goals are one thing if you set them at a special price. You can achieve it by maintaining.
Tips for increasing net income
Now you all understand how net income works and its importance. These are some suggestions for how to increase in the case of loss.
The first and most important tip is to cut down on all your expenses. There is no benefit to an increase in gross income and net income loss. You are only doing this business for a handsome profit. Here are some things you can decrease to maintain net income:
- Reduce your workload
- Use modern technology
- Don’t buy useless products to sell.
- Recycle anything you can.
- Try to sell only those things that customers want.
As we discussed earlier, don’t try to buy useless products. It is also important to buy more products. Try to keep everything in your store that every customer needs. Try to give your customers special concessions so they will return to buy your products. It is the best marketing strategy that every business person can use to gain net income. The more you sell, the more you gain in net income.
Avoid giving Interest in Debts
Firstly, try to avoid loans. If it is important to take a loan, you should return it on time. It will help to avoid any inconvenience.
Search for the weak points of your business to fix them
To improve your income, find the areas interrupting your net income. By finding them, you will overcome problems too.
This net income calculation method is only based on concepts and research. It is not the net income of any businessperson.