LoanHQ
Call(855) 981-8382 Apply Now
Home/ Business Finance Education/ Revenue, Net Income & COGS
📘 Business Finance Education

Revenue, Net Income &
COGS Formulas Explained

Understanding how revenue flows down to net income — and what gets subtracted along the way — is the foundation of reading any income statement. Learn the formulas lenders use to evaluate your business.

Check My Funding Options Read the guide ↓
The Core Flow
Revenue − COGS = Gross Profit − Expenses = Net Income
The Basics

Revenue, COGS, and Net Income: The Three Pillars

Every income statement tells the same story: money comes in as revenue, direct production costs are subtracted as COGS, and what's left after all operating expenses is net income. Understanding each layer matters — not just for accounting, but because lenders analyze these figures to decide how much financing your business can handle.

💰

Total Revenue

The total amount your business earns from sales before any deductions. Also called gross revenue or top-line revenue.

Sales revenue Service income Gross receipts
📦

Cost of Goods Sold

The direct costs tied to producing or delivering what you sell — materials, labor, and manufacturing overhead.

Raw materials Direct labor Manufacturing
📈

Net Income

The "bottom line" — what remains after subtracting COGS, operating expenses, interest, and taxes from revenue.

After-tax profit Net earnings Bottom line

Why lenders care: Lenders use your net income to calculate debt service coverage — whether your business generates enough profit to comfortably repay a new loan. A business with strong revenue but thin net income may qualify for less than expected.

How It Flows

From Revenue to Net Income: A Worked Example

Here's how the income statement flows from top-line revenue down to net income — using a simplified example of a $1,000,000-revenue business:

Total Revenue (Gross Revenue)
$1,000,000
− Cost of Goods Sold (COGS)
−$400,000
= Gross Profit
$600,000
− Operating Expenses (Rent, Payroll, Marketing…)
−$350,000
= Operating Income (EBIT)
$250,000
− Interest Expense
−$20,000
− Taxes
−$55,000
= Net Income (Bottom Line)
$175,000

Gross profit vs. net income: Gross profit only subtracts COGS. Net income subtracts everything — operating expenses, interest, and taxes. A business can have strong gross profit but weak net income if overhead is high.

The Formulas

Essential Revenue & Income Formulas

These are the core formulas used on every income statement and by every lender evaluating your business financials.

Net Income Formula
Net Income = Total Revenue − COGS − Operating Expenses − Interest − Taxes

This is the complete path from top-line revenue to bottom-line profit. Each subtraction represents a real cost the business incurs to operate.

Formula Name
Formula
Total Revenue
Price × Units Sold
Gross Revenue Formula
Sum of all sales before deductions
Gross Profit
Revenue − COGS
Operating Income (EBIT)
Gross Profit − Operating Expenses
Net Income (full formula)
Revenue − COGS − OpEx − Interest − Taxes
Net Income from Balance Sheet
Ending Retained Earnings − Beginning Retained Earnings + Dividends
Revenue Formula (Accounting)
Units Sold × Average Selling Price
Revenue vs. Net Income
Revenue − All Costs & Taxes = Net Income
Cost of Goods Sold

How to Calculate Cost of Goods Sold (COGS)

COGS represents only the direct costs of producing what you sell — not rent, not marketing, not salaries for administrative staff. The formula uses your inventory at the beginning and end of the period to calculate what was actually consumed in production.

COGS Formula
COGS = Beginning Inventory + Purchases − Ending Inventory

If you started the quarter with $30,000 in inventory, purchased $50,000 more, and ended with $20,000 on hand, your COGS = $30,000 + $50,000 − $20,000 = $60,000.

What counts as COGS depends on your business type. Here's a breakdown by industry:

Business Type What's Included in COGS What's NOT Included
Retail / E-commerce Wholesale cost of products sold, freight-in, packaging Advertising, warehouse rent, admin salaries
Manufacturing Raw materials, direct labor, factory overhead Sales commissions, executive salaries, R&D
Restaurant / Food Service Food ingredients, beverages, disposable supplies Rent, front-of-house wages, marketing
Software / SaaS Hosting costs, third-party APIs, customer support Sales team, G&A, product development
Service Business Direct labor for service delivery, subcontractors Office rent, admin staff, marketing

COGS is an expense, not an asset. It appears on the income statement, not the balance sheet. The unsold inventory that remains at period-end is the asset — it sits on the balance sheet until it's sold, at which point it becomes COGS.

Balance Sheet Connection

How to Find Net Income on a Balance Sheet

Net income doesn't live directly on the balance sheet — it lives on the income statement. But it flows into the balance sheet through retained earnings. Here's how to work backwards and find it:

Net Income from Balance Sheet
Net Income = Ending Retained Earnings − Beginning Retained Earnings + Dividends Paid

If retained earnings increased from $80,000 to $130,000 and the business paid $10,000 in dividends, net income for the period was $130,000 − $80,000 + $10,000 = $60,000.

Lender tip: When reviewing your financials for a loan, lenders reconcile the net income on your income statement with the change in retained earnings on your balance sheet. Discrepancies raise red flags — so consistent, accurate bookkeeping matters.

FAQ

Frequently Asked Questions

What is the formula for net income?
Net income = Total Revenue − Cost of Goods Sold (COGS) − Operating Expenses − Interest Expense − Taxes. It represents what the business actually earned after all costs are paid. Net income is sometimes called "the bottom line" because it appears at the bottom of the income statement.
How is cost of goods sold calculated?
COGS = Beginning Inventory + Purchases During the Period − Ending Inventory. This formula captures only the direct costs of goods that were actually sold during the period. Unsold inventory remains on the balance sheet as an asset and is not included in COGS until it's sold.
What is total revenue and how is it calculated?
Total revenue (also called gross revenue) is the full amount earned from sales before any deductions. The basic formula is: Total Revenue = Price per Unit × Units Sold. For businesses with multiple products or services, you sum the revenue from each line. Total revenue is the starting point of every income statement.
What is the difference between revenue and net income?
Revenue is the total money brought in from sales — before any costs are subtracted. Net income is what remains after subtracting COGS, operating expenses, interest, and taxes. A business can have high revenue and low (or negative) net income if costs are high. Lenders look at both: revenue shows scale, net income shows profitability and repayment capacity.
Is cost of goods sold an expense?
Yes. COGS is classified as an expense on the income statement. It is subtracted from revenue to arrive at gross profit. While inventory itself is an asset on the balance sheet, once inventory is sold, its cost moves to the income statement as COGS — an expense that reduces taxable income.
How do you calculate net income from a balance sheet?
You can derive net income from the balance sheet by analyzing the change in retained earnings: Net Income = Ending Retained Earnings − Beginning Retained Earnings + Dividends Paid. This works because net income is the primary driver of changes in retained earnings from one period to the next. For the most accurate figure, always refer to the income statement directly.

Know Your Numbers. Access Better Funding.

Lenders who understand your income statement see you as a lower-risk borrower. See what your revenue and net income can qualify you for today.

Check My Options — It's Free