As a small business owner, there are multiple ways to measure your income streams. Operating income is an important figure to know because it considers your company’s overhead costs.
What Is Operating Income?
Operating income is an accounting metric that expresses how much profit is earned off a business’s ongoing operations.
It considers a wide array of expenses, including costs like raw materials, labor, and rent. The figure does not take into consideration non-operating expenses and incomes, like taxes or the sale of a large asset.
Why Should You Know Your Company’s Operating Income?
Accountants, lenders, and investors like to know operating income because it gives a holistic view of how much money your company is earning or losing compared to its expenses.
What Is the Difference Between Operating Income and Gross Income?
Gross income is your company’s total revenue minus the cost of goods sold (COGS). COGS is the direct expense paid for each good sold (i.e., the cost of manufacturing or acquiring your goods). For service-based businesses, think about the direct costs associated with each “unit” of service completed, like direct wages. This does not include indirect costs, such as rent for your office.
Operating income takes gross income and subtracts operating costs, so it will likely be both a lower number and more accurate financial illustration of your operations.
How Do You Calculate Operating Income?
To determine operating income, subtract your operating expenses from your gross income. Only include income and expenses associated with your core business operations.
Non-operating expenses could include taxes, cash paid out to settle a lawsuit, or the purchase of a large piece of equipment. Non-operating income includes interest earned from investments in other companies or selling off a large asset. Basically, if the income or expense is a one-time deal, it isn’t related to your core operations.
What Is the Difference Between Operating Income and Net Income?
Net income is your company’s “bottom line.” This figure takes your operating income and subtracts all your other expenses, like taxes. While net income provides a simple understanding of how your overall business is doing, operating income showcases how your core operations are faring.