Calculating preliminary net income is essential for businesses as it helps determine the profitability of a company before taking into account taxes and other deductions. By understanding how to calculate this figure, business owners can gain insights into their company’s financial health and make informed decisions. In this article, we guide you through a step-by-step process to calculate preliminary net income.

Step 1: Gather Financial Data

To begin calculating preliminary net income, gather all relevant financial data. This includes sales revenue, cost of goods sold (COGS), operating expenses, and any other additional incomes or losses. The key is to have precise figures to calculate a more accurate estimate of net income.

Step 2: Calculate Gross Profit

The first step in calculating the preliminary net income is finding the gross profit of your business. To do this, subtract the COGS from sales revenue. The formula for gross profit is as follows:

Gross Profit = Sales Revenue – Cost of Goods Sold

Make sure your COGS reflects all costs associated with producing or purchasing your product.

Step 3: Calculate Operating Income

Next, subtract your company’s operating expenses from its gross profit to determine operating income. Operating expenses include costs such as salaries, rent, utilities, and depreciation but exclude taxes and interest expenses. The formula for operating income is:

Operating Income = Gross Profit – Operating Expenses

Operating income represents the profits a company generates through its core operations before considering non-operating revenues and expenses.

Step 4: Add Other Incomes and Losses

In addition to regular revenue sources from the business operations, there might be other incomes and losses affecting your business. This could include gains on investments or sales of assets and losses on asset impairment or disposal.

To find the total other incomes factors that will be added in the calculation of preliminary net income use this formula:

Total Other Incomes/ (Losses) = Sum of Other Incomes – Sum of Other Losses

Step 5: Calculate Preliminary Net Income

Finally, to calculate preliminary net income, add the operating income and other incomes/losses. The formula for calculating preliminary net income is:

Preliminary Net Income = Operating Income + Total Other Incomes / (Losses)

Keep in mind, this calculation does not include taxes or any interest expenses.

By using these steps, you can calculate a preliminary net income to give you an idea about your business’s profitability. Keep in mind that this value represents an estimate before taxes and other reductions are considered and may fluctuate to final net income after adjustments. Regularly monitoring your net income allows for better financial planning and helps set the stage for understanding your company’s overall profitability.