the net income budget

THE NET INCOME BUDGET

Net Income is what is left after all expenses have been paid. Often referred to as bottom

line income

There are a couple of c

oncepts

we

need to underst

and before

computing n

et inco

me

COST STRUCTURE

A cost structure is the distribution of expenses

that make up your business

COST FALLS UNDER TWO BIG CATEGORIES NAMELY

Fixed costs Variable costs

CONTRIBUTION MARGIN

Contribution margin is simply the price of your product or service less

your variable costs

YOUR CONTRIBUTION MARGIN IS THE MUSCLE THAT NEEDS TO BEAR THE WEIGHT OF YOUR FIXED COSTS

Badly Run Business Well Run Business

BREAK-EVEN POINT

The break-even point is the point where total cost

equals total revenue

THE BREAK-EVEN POINT TELLS YOU HOW MANY UNITS YOU NEED TO SELL BEFORE YOU BECOME PROFITABLE

Break-even point is defined as where: Total Revenue = Total Cost

TOTAL COST

To be profitable total revenue must exceed total cost. Total cost is

composite of all fixed and variable cost

THE FORMULA FOR TOTAL COST IS SHOWN BELOW

Total cost = Fixed Cost + Variable Cost

Total fixed cost = Fixed Product Overhead + Fixed Selling and administrative expenses

Total variable cost = Variable Product Overhead + Variable Selling and administrative expenses

NET INCOME

Net income is total revenue minus total cost

LOOK AT THE BOTTOM LINE, YOU COULD BE LOSING MONEY WITHOUT KNOWING IT

Net income is computed as: Total Revenue – Total Cost

Net Income per unit is computed asRevenue per unit – Cost per unit

Illustration

SEE AN EXAMPLE BELOW

You can also download the workbook here

SUMMARY

Previously, we discussed therevenue equation and how to

effectively predict our cost of doing business

www.mybusinesskpi.com

Email: evelyn@mybusinessskpicoach.com

Phone: (417) 812-5945

Finally, we now know how to use this

information to predict net income

www.mybusinesskpi.com/NetIncomeBudget.html