Summarise with AI
How the P&L gets there
Net income is the end of a subtraction chain, and each step answers a different question:
- Revenue − cost of sales = gross profit — does the pricing work?
- Gross profit − operating expenses = operating profit — does the business work?
- Operating profit − interest and other items = net income — what is actually left?
A business can have healthy gross profit and negative net income. That means the product is priced correctly and the overheads are too large for it.
Profit is not cash
Net income is calculated on an accruals basis: revenue is recognised when earned, expenses when incurred. Cash moves on a different schedule entirely.
Which is why a profitable business runs out of money. The usual causes:
- Customers on 30-day terms while wages are paid weekly
- A quarterly BAS payment landing in one month
- Stock bought before it is sold
- Growth — funding wages and inventory ahead of the revenue they produce
Run a cash flow forecast alongside the P&L. They answer different questions and you need both.
Depreciation and other non-cash items
Some expenses reduce net income without any money leaving the bank in that period — depreciation being the main one. An asset bought three years ago keeps reducing profit today.
This is why net income and the bank balance rarely agree, and why lenders often look at earnings before interest, tax, depreciation and amortisation alongside it.
Key takeaways
- Net income is what remains after every expense, including interest and tax
- Healthy gross profit with negative net income means overheads are too high
- Profit is accruals-based; cash is not — a profitable business can still run out
- Non-cash expenses such as depreciation reduce profit without moving money
Wages are usually the largest expense between revenue and net income — RosterElf costs them before the shift is worked.
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