No matter how much you love what your business is. You are only doing this to exist in this world.
You must pay other employees, taxes, and rent when running a business, even a small store. 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 complete record in your mind. You have to calculate every form. In the income statement, you can calculate the state by a process of net income.
Introduction to net income
Net income is one of the most 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.”
Key points:
- Tells about the health of a business.
- The Bottom line of the company.
- Describes the business accounting period.
Net income vs. gross income
Net income gives you an overall idea of your business. It gives you the overall health of your business. As we told you, 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 vast difference in net income and gross income, it will be a warning sign for your business. Net income varies from company to firm.
How do you compute net income for a merchandiser?
Today we will discuss how to compute the net income of a merchandiser comprehensively.
It is essential to note that net income analysis is not only for merchandisers but also investors and individuals. Individuals’ gross income fluctuations can be examined.
Ways to compute net income:
There are two methods to compute net income. the will give you an idea about how to compute net income for merchandise formula. One is a complete method, and the other is simple.
Simple method:
The simple way of net income formula is to subtract gross income from expenses. Gross income refers to your income before paying all the taxes and other deductions.
Formula:
Gross income – Expenses= net income
Complete method:
For a complete method, you must calculate the total revenue, cost of goods sold, and expenses. You will now begin with actual income—Minus revenue from the cost of goods sold and total expenses.
Formula:
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 calculate net income, you can apply this formula, the most comprehensive and complete method.
Before analyzing the net income, you must know the terms like revenue, cost of goods sold, tax, interest on debts, and total expenses.
- Total revenue:
If you want to know how much money you make after selling your products and services. It would help if you calculated the total revenue.
Total revenue is the payment obtained by selling its products and services. Total revenue is also known as “gross revenue.”
For example, if a company or store 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. It will not include fixed expenses such as rent, utilities, and salaries. But certain types of labor costs can be added.
It is essential to measure. It helps to deduct all these costs. It utilizes in measuring costs during business when you sell or resell them.
- Total expenses:
Total expenses are the amount that a company uses to make a product. You have to manage all expenses properly.
It includes the following expenses:
- Cost of goods sold.
- Salaries, commission, labor.
- Rents and utilities.
- Payable interest and bank charges.
Taxes. 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 essential 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 offers loans based on interest. This concept is only based on whether they will not return money in time. Banks and companies use the interest on debts to compensate for all risks to avoid late responses.
It is usually the agreement annually. You have to pay interest annually.
You can now easily calculate net income using the formula and your corresponding values to understand all the concepts. Keep in mind that these values are only for examples and ideas. It is not the value of any company.
Merchandising balance sheet example:
Net income in the income statement for a merchandiser:
- Total revenue
$ 6000
- Cost of goods sold
$200
- Gross profit
$300
- Operating expenses
- Salary
$300
- Rent
$400
- Utilities $300
- Depreciation
$200
- Total operating expenses
$1200
- Interest expenses
$200
- Tax
$500
Total revenue: $6000
Cost of goods sold: $2500
Expenses: $1200
Debt payment (Interest expenses): $200
Tax: $500
All the values are given out; it is comprehensive to compute net income.
Formula:
Put that formula that was given out
Net income: Total revenue – costs of goods sold – interest of debts – Taxes – total expenses
Net income: $6000 – $2500 – $200 – $500 – 1200
Net income: $1600
Importance of calculating net income for a merchandiser
Determines financial health.
It is important to take data on rents, salaries, taxes, etc. It is also essential 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. 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 forward. The simple method can also be used to calculate net income. It would be best if you subtracted from gross income and total expenses. It would be best if you calculated an accurate value.
Problem-solving technique.
It is a problem-solving technique in which your net income exceeds expectations. You can briefly analyze what is causing problems in your statement of financial position merchanidising. 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 place 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 pay taxes. Net income informs you of the overall predictions about the taxes you must bear in upcoming years. It also helps you take better responsibility.
Provide 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 exclusive operational data.
It 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.
Tips for increasing net income:
Now you all understand how net income works and its importance. Now, these are some suggestions for how to increase in the case of loss.
Reduce expenses.
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 customer want.
Increase sale
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. Give your customers special concessions so they will return to buy your products. This is the best marketing strategy that every business person can use to gain net income. The more you sell, the more you earn in net income.
Avoid giving interest on debts.
Firstly, try to avoid loans. If taking a loan is essential, you should return the loan on time. This will help to avoid any inconvenience.
Search weak points of your business:
Find the areas that interrupt your net income to improve your income. By finding them, you will overcome problems too.
Important note:
This net income calculation method is only based on concepts and research. This is not the net income of any business person.