metrics explained

Net Income vs Earnings Before Taxes: What's the Difference?

Most people are familiar with the term "net income." It's what's left of your income after taxes have been deducted. But what about "earnings before taxes," or EBT?

EBT is simply your gross income minus any expenses you incurred to earn that income. For example, if you're a freelance writer and you earned $1,000 last month, your EBT would be $1,000 minus any expenses you incurred in the course of your work, such as the cost of your computer, internet service, and so on.

EBT is important because it's a measure of your true profitability. Net income, on the other hand, is what's left after taxes have been deducted. So, if you're in the 25% tax bracket, your net income would be $750 (25% of $1,000).

While net income is what's left after taxes, it's not the same as profit. Profit is what's left after all expenses have been deducted, including the cost of goods sold (COGS).

For example, let's say you own a clothing store and you had $100,000 in sales last month. Your COGS was $60,000, which means your gross profit was $40,000. But you also had other expenses, such as rent, utilities, and so on, which totaled $20,000. That means your net income was $20,000.

While net income is what's left after taxes, it's not the same as cash flow. Cash flow is the measure of how much cash is coming in and going out of your business. It's important to track your cash flow because it's what allows you to pay your bills and keep your business running.

So, to sum up, here's the difference between net income and earnings before taxes:

  • Net income is what's left of your income after taxes have been deducted.
  • Earnings before taxes (EBT) is your gross income minus any expenses you incurred to earn that income.
  • Profit is what's left after all expenses have been deducted, including the cost of goods sold (COGS).
  • Cash flow is the measure of how much cash is coming in and going out of your business.

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