The topic of net earnings comes with a lot of questions.
What are net earnings? Are net earnings the same as net income? What’s the difference between gross and net earnings? What factors impact net earnings?
All valid questions, and all needing answers.
In this article, we’ll provide those answers. We’ll explain what net earnings are in precise terms, and clear up any confusion around similar terms like net income, operating earnings, and gross earnings. We’ll also explain how to use net earnings to assess how a business is performing, so you can stack your own organization up against benchmarks.
What are net earnings?
Net earnings are a company's total profit after deducting all expenses, taxes, and costs. Essentially, it's your total revenue minus everything you had to pay for during the same financial period.
Net earnings is the same as net income and is also sometimes referred to as the bottom line because it is the final figure found on the income statement.
Why are net earnings important?
There’s one big reason why it's a good idea to pay attention to the net earnings line on your profit and loss statement:
They reflect your company’s profitability and financial health. Or, in layman’s terms, they tell you how much money you’re making.
Net earnings indicate how effectively a business can generate profit after covering all expenses, taxes, and interest. It's all well and good making $1m in revenue, but if your expenses amount to $999,999, you’re not exactly in a profitable position.
Investors and stakeholders use net earnings to evaluate the performance of a business, make investment decisions, and assess the growth potential of a corporation.
If net earnings are consistently positive (and growing), this tends to attract investors, boost creditworthiness and the company’s ability to access financing, and generally support business expansion.
Role of net earnings in financial statements
Net earnings are found as the final figure on a company’s income statement, summarizing its profitability over a specific period.
The number connects operational performance with overall financial health, and also serves as a foundation for other metrics, such as earnings per share (EPS) or retained earnings on the balance sheet.
Net earnings offer insights into a business's cost management strategies, operational efficiency, and revenue generation capabilities.
Impact of net earnings on the bottom line
Net earnings are the bottom line. They represent a company's final profit after all deductions.
A strong bottom line is a signal of financial stability and growth potential. Conversely, a weak bottom line highlights inefficiency or challenges.
How net earnings affect cash flow
Net earnings do not directly impact cash flow, but they do have some indirect impacts.
For example, a company’s net earnings can influence decisions on reinvestment, divides, and debt payments, all of which have downstream impacts on cash flow.
As a general rule, however, positive net earnings correlate with better cash flow.
How to calculate net income
Net income has a pretty simple formula:
Let’s walk through the steps together:
- Begin by adding all income generated from sales of goods, services, and any other revenue streams.
- Then, subtract your cost of goods sold (COGS), the direct costs associated with producing or delivering goods or services, such as raw materials and labor.
- Next, subtract operating expenses like rent, salaries, utilities, and marketing.
- Then, account for non-operating items like interest expenses and investment gains or losses.
- Finally, deduct income taxes to get your net income.
Let’s illustrate that with an example. Say your company has the following figures:
- Total Revenue: $500,000
- COGS: $200,000
- Operating Expenses: $150,000
- Interest: $10,000
- Taxes: $40,000
Here’s what the calculation will look like:
Net income = $500,000 - ($200,000 + $150,000 + $10,000 + $40,000) = $100,000.
Therefore, although you brought in $500,00 in revenue, your net income is $100,000.
Factors that affect the calculation of net income
There are several factors that can impact the calculation of net income.
A few common examples include:
- Revenue fluctuations. Changes in sales volume or pricing directly impact total revenue, which is the starting point for calculating net earnings.
- Cost of goods sold. Higher production costs increase COGS and reduce net income.
- Operating expenses. Expenses like marketing, utilities, and administrative costs can significantly affect net income.
- Depreciation and amortization. Non-cash expenses like these also reduce taxable income, thereby impacting net income.
- Interest payments. Debt obligations lead to interest expenses, which consequently impact net income.
- Taxes. Changes in tax rates or tax credits directly affect the final net income.
- Non-operating income and expenses. Income from investments, currency fluctuations, or unusual charges can also influence the net income calculator.
- Accounting methods. Choices like the decision to use accrual or cash accounting or different valuation methods (e.g. FIFO vs. LIFO) can affect how income and expenses are recognized.
Using net earnings to assess business performance
Net earnings is an important metric in assessing the performance of a given business.
Investors use it to determine whether or not to invest in a given opportunity, business leaders to understand how their company is performing, and stock market investors use to it to compare stocks.
Some quickfire ways that you can use net earnings to assess business performance include:
- Looking at trends over time. Consistent growth is a good sign.
- Comparing against benchmarks and other companies in the industry.
- Calculating the net profit margin (Net Earnings ÷ Revenue × 100). A high margin reflects efficient operations and cost management.
- Analyzing how historical net earnings stack up against revenue. Declining net earnings relative to revenue may signal inefficiencies.
It's important to note, however, that relying solely on net earnings to assess a company’s financial health does have limitations.
Most notably, it doesn’t account for cash flow—essential for daily operations—nor does it provide insights into growth potential or market performance. Additionally, one-off expenses or revenue streams can distort net earnings for a given period, making it much less reflective of ongoing performance than one might assume.
To develop a more comprehensive view of the financial health of a business, net earnings should be assessed alongside three other key financial metrics:
- Gross profit
- EBITDA
- Cash flow
This multi-faceted approach provides a clearer picture of a business’s true performance and long-term viability.
Types of earnings
A company’s earnings can be broadly categorized into two categories:
- Operating earnings
- Non-operating earnings
Both types contribute toward the company's net earnings (bottom line), so it's important to have a good understanding of what each is.
Operating earnings
Operating income is earnings derived from a company’s core business operation. They reflect the profit made after deducting operating expenses like wages and overhead. They are a key indicator of a company's operational efficiency and ability to make money from its primary activities
For example, a retail store’s operating earnings would include profits from selling merchandise, and a marketing agency’s operating earnings would include profits from selling advertising packages.
Non-operating earnings
Non-operating earnings are income that come from activities that are unrelated to the core business, such as:
- Interest
- Gains from asset sales
- Investment income
These earnings tend to be one-off or irregular and provide additional income while not necessarily reflecting the ongoing operational performance of the business.
For example, a manufacturing company might earn non-operating income from selling a factory building, or a FMCG chain might earn non-operating income from investing its earnings in the stock market.
Track trends in net earnings with automation tools
Understanding how your company is tracking from a net income perspective is critical. It helps you analyze profitability, make investment decisions, and track performance against goals.
It's a metric you’ll want to have quick access to at all times, which is why the best leaders use a financial operations platform like BILL to track net earnings in real-time.
Our diverse, integrated platform is stacked with powerful features, from real-time reporting to spend analysis capabilities to a range of automation functions that will help you speed up internal finance and admin work.
FAQ
Net earnings vs. net income: What’s the difference?
Net earnings and net income are synonyms; they’re the same thing.
The two terms can be used interchangeably, referring to the amount of profit your company makes after all expenses have been taken into account.
Net earnings vs gross earnings: What’s the difference?
Net earnings and gross earnings are quite different things.
Gross earnings (or gross profit) represents your company’s revenue minus the cost of goods sold (COGS). That is, it's what’s left over from your income after subtracting the expenses related to the direct production of your products or delivery of your services.
Net earnings, on the other hand, takes gross and earnings and deducts all remaining expenses, such as operating costs, taxes, interest, and even non-operating items like losses on investments.
