Net Income vs. Net Revenue: What’s the Difference?

Net revenue is a non-GAAP (generally accepted accounting principle) that demonstrates how much a company earns on sales and services after some expenses like returns and allowances (customer returns) are removed, while net income is an approved GAAP that shows how much profit a company earned (and gets to actually keep) after all expenses are subtracted.

Both metrics are used to assess the financial health of a company and its performance, but they play different roles at various stages in your company, especially when you are applying for a small business loan, ready to expand your footprint or sell your business, and looking for investors.

Here’s how net revenue vs net income works, what each measures, and how to use both of these numbers to accurately analyze your business’ success.

What Is Net Revenue?

Net revenue, which is also called net sales, is the total amount of money a company makes after subtracting out non-operating expenses like discounts and customer returns. Net revenue is not defined by the Financial Accounting Standards Board, so it may be calculated differently, but there is SEC guidance that states that net revenue should refer to how much money a company can claim after subtracting certain expenses incurred such as discounts, returns, and allowances.

To calculate net revenue, take your company’s total sales (also called gross revenue) and subtract the returns, discounts, and allowances like customer payment plans.

Allowances can differ widely by company and industry. For instance, Dell Technologies adjusts gross revenues down by what they call “impact of purchase accounting” to get their net revenues while Foot Locker doesn’t differentiate between gross vs net and only recognizes a single revenue line (calculated as POS sales net of returns excluding taxes).

Let’s say that you own a shoe store and you sold $100,000 worth of shoes this quarter — but you had to hold a 30% off sale to get customers to buy them all. In this case, you’d then have a net revenue of $70,000.

The difference between gross revenue and net revenue indicates how well a company’s marketing and sales methods are working. In this case, a large discount might indicate that the products were initially priced too high.

What Is Net Income?

Net income is the company’s profit after subtracting all costs and expenses, which allows you to see how much cash you have on hand to reinvest in your company, increase marketing budgets, streamline operations, hire more employees, or give yourself a raise. This is different from net revenue because it calculates how much profit you have after all expenses are paid.

To calculate net income, take your company’s net revenue and subtract the cost of goods sold, operating expenses, interest and depreciation charges, taxes, and any miscellaneous expenses.

Let’s stick with the shoe store example and imagine it’s located in Florida. Suppose you have $100,000 in sales and your customers returned $3,000 worth of shoes. You also have a COGS of $40,000, operating expenses of $20,000, and you depreciated $5,000 worth of assets.

Here’s how to calculate net revenue and then determine your net income from there.

Your net revenue is going to look strong at $97,000, but that doesn’t mean you have this much money to spend. Your net income might look lower at $28,160, but this encompasses liquid assets, which are yours to use as you see fit. Seeing both numbers allows you to make smart financial decisions about your marketing, operations, and more. This is why knowing their differences and how to use them is important.

How Do Net Revenue and Net Income Impact a Business?

Net income and net revenue are important factors when taking out a small business loan, deciding whether or not to expand, and determining how to streamline processes or eliminate waste.

If you’re looking to grow your business both net revenue and net income matter as they let you know what is optimized and what could be improved. When you want to build customer loyalty, figure out which promotions create more sales, know if a product enhancement reduced returns, or determine what discounts and deals bring back old customers, net revenue is better than net income because it shows you what the total sales amount is after the promotions, discounts, and returns.

When you want to know if your business is operating at maximum efficiency, where you have wasted spend, and how much profit you have to increase wages or expand your business, choose net income over net revenue. This number shows you where you spend more money and can start to reduce the costs, as well as how much flexibility you have to reward your team, grow your footprint, or give yourself a raise.

If you’re taking a loan, the lender will use net income to help determine if you’ll be able to pay the loan back, as this figure shows if you’re profitable. Meanwhile, the lender may also use net revenue to evaluate risk factors when it comes to cash flow, marketability, and potential profit margins.

If you’re looking to expand your business, understanding your net income will help you to know if there is a safety net to fall back on in case the new location or brand extension doesn’t pan out, and your net revenue may help to create promotions and incentives to get new customers in the door or current customers to try the new lines.

Both metrics matter for other situations, too, like selling your business. Investors and buyers will be interested to see if they will be profitable from the start, which is defined by your net income.  While a low net income may seem scary to present to potential investors, it may also show your business as a hidden gem, depending on your asking price.

If you’re not ROI positive on net income but have a strong revenue, this can show there is demand and profit to be made if the buyer optimizes the losses and eliminates waste. Further, if you’re working with experienced investors, they can give you the insights you need to get into the green.

The reverse can also be true. Let’s say Business A posts a net revenue of $10 million per year, which causes more initial excitement among investors compared to Business B, which posts $2 million per year. However, if $9.9 million in Business A goes to overhead on payroll, marketing, office expenses, supplies, etc., and $1.5 million of the $2 million from Business B is net income, the latter will be the more appealing investment. Essentially, even a sky-high net revenue can’t hide the fact that a business has a low net income.

And both net income and net revenue lead to one more concept for making business decisions: the net profit margin ratio.

The impact of net revenue and net income on net profit

The net profit ratio accounts for both net revenue and net income, and is used to evaluate a business’s ability to produce profit and where to adjust expenses. It’s also considered to be a strong indicator of a company’s overall success and financial health – a higher net profit margin indicates a business can control its costs and provide its goods or services at a price notably higher than its costs.

It can be determined by dividing the net profit by the revenue. Click here to learn about the difference between revenue and profit.

Net profit ÷ Revenue = Net profit margin ratio

For example, say your business has a net profit of $10,000 for every $100,000 in revenue. In this case you’d have a 10% profit margin, meaning for every $1 of revenue, the business earns $0.10 in net profit.

While net revenue and net income may sound similar, net revenue will help you demonstrate your company’s current marketability and potential cash flow, and net income shows how healthy and efficient your business is.

Checking these numbers frequently helps you as a business owner to better understand your business opportunities, ways to trim expenses, and how you can increase profits — whether you’re looking to take out a loan, expand locations, acquire a competitor, adjust your expenses, or sell your business.