A number of terms in business finance have differing or even fluid meanings in day-to-day use. Some terms used interchangeably by the average person actually have very specific definitions in a finance or accounting context. Case in point: profit and net income. Though both terms deal with the positive flow of cash, their definitions and contextual usage differ in important ways.
- Profit simply means the revenue that remains after expenses; it exists on several levels, depending on what types of costs are deducted from revenue.
- Net income, also known as net profit, is a single number, representing a specific type of profit.
- Net income is the renowned bottom line on a financial statement.
What Is Net Income?
Net income, also called net profit or net earnings, is a concrete concept. The figure that most comprehensively reflects a business' profitability—and used in publicly traded companies to calculate their earnings per share—it represents the renowned bottom line of an income statement.
The net income of a company is the result of a number of calculations, beginning with revenue and encompassing all expenses and income streams for a given period. All the money that flows in and out of a company is accounted for via this sum. This includes expenses for the manufacture of products; operating expenses; payment on debts; interest paid on loans or accrued from investments; additional income streams from subsidiary holdings or the sale of assets; depreciation and amortization of assets; taxes; and even one-time payments for unusual events.
Net income, like other accounting measures, is susceptible to manipulation through such techniques as aggressive revenue recognition or by hiding expenses. When basing an investment decision or evaluation on net-income numbers, investors and analysts review the quality of the numbers that were used to arrive at the business's taxable income as well as its net income.
So, strictly speaking, net income is a form of profit.
Is Net Income The Same As Profit?
What Is Profit?
While net income is synonymous with a specific figure, profit conversely can refer to a number of figures. Profit simply means revenue that remains after expenses, and corporate accountants calculate profit at a number of levels.
For example, gross profit is revenue less a specific type of expense: the cost of goods sold, or COGS. Operating profit refers to revenue minus the COGS and operating expenses—all the costs, both fixed and variable, that are necessary to keep the business running must be included.
Calculating profit at different stages allows companies to see which expenses take the biggest bite out of the bottom line.
Much of business performance is based on profitability in its various forms. Some analysts are interested in top-line profitability, whereas others are interested in profitability before expenses, such as taxes and interest, and still others are only concerned with profitability after all expenses have been paid.
Real World Example of Profit and Net Income
To illustrate the difference between net income and profit, let's take a look at Berkshire Hathaway's annual income statement for 2018.
Its gross profit (listed as gross income)—revenues minus COGS—is reported as $50.7 billion. Its net income —which includes operating expenses and income tax payments—is listed as $4.02 billion.
Net profit is always going to be lower than gross profit. But investors interested in Berkshire Hathaway stock might notice something interesting: In 2014, the corporation's gross income was $45.27 billion, and its net income was $19.87 billion. What factors, they might ask, have caused Berkshire's gross income to rise—and yet its net income to fall?