# Net Income

This article explains how **Net Income** works in Model Reef.

You will learn:

* How Net Income is calculated from the P\&L structure.
* How Net Income flows into retained earnings on the Balance Sheet.
* How it relates to cash generation and valuation.

Net Income is the bottom line earnings measure after interest and tax.

***

## 1. Net Income definition

{% hint style="info" %}
In Model Reef, **Net Income** is also called **Net Profit After Tax (NPAT)**.
{% endhint %}

It is calculated as:

```
EBITDA
minus Depreciation and Amortisation
= EBIT
minus Interest Expense
= EBT
minus Tax Expense
= Net Income (NPAT)
```

All of these components are generated automatically from variables, categories and timing rules.

***

## 2. Net Income in the P\&L

Net Income appears at the bottom of the P\&L for each period.

You can view it:

* For the consolidated model.
* For individual branches and their children.
* Across different scenarios.
* In different period views such as monthly, quarterly or annual.

You can also use Net Income in custom charts and reports as a reference metric or comparison point.

***

## 3. Net Income and retained earnings

On the Balance Sheet:

* Net Income increases **Retained Earnings** each period.
* Dividends and other equity distributions decrease Retained Earnings.

The standard retained earnings movement is:

```
Opening Retained Earnings
plus Net Income
minus Dividends
= Closing Retained Earnings
```

Model Reef maintains this link automatically. You do not need to post manual retained earnings journals.

***

## 4. Net Income versus cash

{% hint style="warning" %}
Net Income is an accrual-based measure. It does not show when cash is received or paid.
{% endhint %}

Differences arise due to:

* Working capital movements such as changes in Accounts Receivable and Accounts Payable.
* Timing of tax payments versus tax expense.
* Capex and financing flows which are not expenses in the P\&L.

To understand cash generation you should use Net Income together with:

* The Cashflow Statement.
* The Cash Waterfall.
* Working capital analysis.

This combination explains why two businesses with similar Net Income can have very different cash outcomes.

***

## 5. Net Income in scenarios and valuation

In scenarios, Net Income helps you:

* Compare profitability across Base, Downside and Upside cases.
* Understand how leverage and tax changes affect earnings.
* Check for sensible margins and growth patterns before focusing on cashflows.

In valuation, free cashflows come from adjusting earnings for non-cash items, working capital and capex, rather than from Net Income directly. However, Net Income remains an important sanity check and communication metric for stakeholders.

***

## Related articles

* [Retail Workforce & Roster Forecasting](/use-cases/retail-single-and-multi-site/retail-workforce-and-roster-forecasting.md)
* [Build a KPI Dashboard](/how-tos/dashboards-and-reporting/build-a-kpi-dashboard.md)
* [Depreciation](/help/financial-outputs-and-valuation/depreciation.md)
* [Category Selection](/syntax/variables-syntax/category-selection.md)


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