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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: [email protected]
Phone: (417) 812-5945
Finally, we now know how to use this
information to predict net income
www.mybusinesskpi.com/NetIncomeBudget.html
