How To Calculate Operating Income (With Examples)

Balancing your expenses and income is an important part of any successful business. Regardless of the type of business you’re running, you have to make sure you’re earning more than your spending.

Well, given that managing your income and expenses is an important part of your success, you should consider calculating your operating income regularly. Operating income allows you to track your business’s financial health by outlining the profit made from your ongoing business operations.

Luckily, you can calculate your business operating income on your own, which will allow you to manage operations better. After all, the more you know about your business’s financial health, the easier it will be to make important financial decisions and produce a higher income.

With that in mind, this article will examine how to properly calculate and manage your operating income, as well as provide examples of its use.

What Is Operating Income?

In simple terms, operating income can be defined as your business’s ability to generate earnings from operational activities. It does so by measuring the amount of profit realized after deducting various operating expenses. Some of the most common operating expenses that can be accounted for are the cost of goods sold (COGS), wages, and depreciation.

It’s important to note that operating costs are different from other expenses. For instance, there are one-time or unusual costs like interest, lawsuit expenses, depreciation, or obsolete inventory costs. These are known as non-operating expenses and would not be considered in an operating income calculation.

Instead, operating cost only considers a business’s gross income (total revenue−COGS) and then subtracts all operating expenses. It’s important to use gross income instead of net income because operating income doesn’t consider taxes.

What is the Importance of Operating Income?

Operating income is a helpful accounting figure because it shows how profitable a company’s central business operations are. In general, a higher operating income signifies a more successful and profitable business.

Additionally, because operating income only accounts for regular expenses and not one-time or unusual costs, it is useful for investors. Unlike other measurements, which can skew a company’s yearly profit margins, operating income will give investors an idea of whether or not a company is consistently profitable.

For this reason, a company’s operating income gives investors a clear picture of how they make money and if they make money regularly.

Knowing operating income is also beneficial for a company’s internal decision-making, as it allows business owners to make strategic decisions about their company. For example, a lack of operating income could indicate that changes are needed, whereas steadily increasing operating income could signify that it’s time to expand the company’s reach.

Overall, while analyzing total revenue is useful, it isn’t the only calculation business owners should be making. On the contrary, it’s vital to thoroughly examine all aspects of your business’s financial health, including its operating income.

How To Calculate Operating Income

For the most part, calculating your business operating income is actually rather simple. First, gather information using the following steps:

1. Look for your income statement, and at the top, you’ll see COGS subtracted from revenue to find gross profit.

2. Locate your operating expenses, listed below gross profit.

3. Add up all of your operating expenses.

4. Subtract the operating expenses from your gross income.

5. The answer will be your operating income!

The equation is as follows:

Operating Income = Gross Income − Operating Expenses

Remember that operating expenses won’t cover every aspect of your business expenses and income. Instead, it’ll tell you the core profitability of your business.

If you’re ever trying to calculate your operating income without using your income statement, you can do so by knowing what your operating expenses are. Operating expenses include rent, equipment, inventory costs, marketing, payroll, insurance, etc.

On the other hand, operating expenses exclude SGA expenses (Selling, general and administrative), depreciation, and amortization.

Once you know your operating income, you can also use it to calculate your operating margin. This figure will outline your company’s operating efficiency.

Operating Income Examples

Now that you know how to calculate operating income, here are a few examples to help you understand it in detail:

1. Joseph runs a clothing company and wants to present his operating income to his investors. He’s hoping the numbers will give his investors the confidence they need to help fund his new clothing line.

   Joseph reviews his income statement and sees that his business made $275,000 in revenue last month. His most notable revenue expenses included:

   • $2,600 in utilities

   • $110,000 in employee salaries

   • $4,500 in insurance

   • $7,500 in marketing

   • $3,000 in damaged clothing

   • $9,100 in property and upkeep

   • $27,000 in Cost of Good Sold (COGS)

   With this information, we can calculate the clothing company’s gross income:

   Gross Income = Revenue – COGS

   $275,000 – $27,000 = $248,000

   Now all that’s left is to add up all of Joseph’s operating expenses. Keep in mind that damaged clothing would not be included in this figure, as that’s a non-operating expense. However, the other costs add up to be $133,700.

   With that, we can calculate operating income.

   Gross Income – Operating Expenses = Operating Income

   $248,000 – $133,700 = $114,300

   Therefore, Joseph’s clothing company made $114,300 through its core operations.

2. Violet wants to achieve an operating income that’s at least 20% higher than her last operating income. This will be her Percent Change in Operating Income. To calculate it, she needs the figures for both years.

   Year 1: $455,000 – $260,400 = $194,600

   Year 2: $525,000 – $275,300 = $249,700

   Now that we know her operating income from both years, we can use them to calculate a percentage. Follow these steps:

   1. Year 2 Operating Income – Year 1 Operating Income ($249,700 – $194,600 = $55,100)

   2. $55,100 ÷ Year 1 Operating Income ($55,100 ÷ $194,600 = 0.28)

   3. 0.28 x 100 = Percent Change in Operating Income (0.28 x 100 = 28%)

   Nice! Violet’s operating income increased by 28% within the past year, which is even higher than she was hoping for.

Setting Goals to Improve Your Career

Your operating income is a useful figure that can help shine some light on your business’s current financial health. After all, you can’t expect to implement tangible financial goals that improve your career if you don’t know where you currently stand.

Think about where you want your business to be in a year or five years to come. Do you want to increase your operating income by 30%? Or have the financial resources to expand and fund a new location? If you have a specific career goal in mind, your operating income can give you the information you need to plan for it.

For instance, if your business currently operates in one location and you’re interested in opening a second location, you can use the operating income to plan for the future. First, calculate your current operating income. Afterward, look at your income and compare it to past incomes, so you can estimate how your business might continue growing.

Once you know how much money you have and how much money you might gain going forward, you can plan your expenses around the idea of saving for a second location.

Further, if you have a positive operating income that increases annually, you can seek even more funding from willing investors. Investors can be a great way to forward your career goals.

Ultimately, no matter what your business’s current financial health is, it’s important to look into all aspects of the financial situation, such as operating income, in order to plan for the future.

Frequently Asked Questions About Operating Income

1. What is the difference between operating income and profits?

   There is an important difference. Operating income doesn’t give a full picture of a company’s expenses, as the figure opts only to address how effective the company’s operations are. In this way, it does not consider the many non-operating expenses that profit will take into account.

2. What is non-operating income?

   If operating income is the profit associated with a company’s core business operations, then non-operating income relates to profit coming from activities not associated with operation. For example, non-operating income can include items like dividend income, interest, investments, and more.

3. Can a company lose money even with a positive operating income?

   While a positive operating income is generally a sign of profitability, that doesn’t necessarily mean that a company is making money.

   There are many factors that go into a company’s overall profit, such as interest, taxes, one-time charges, damages, and more. Even if a company is operating successfully, there can still be cases where incidents or poor financial decision-making can lead to lost profit.

4. What does operating income tell you about a company?

   A company’s operating income will tell you how much profit a company makes before taxes from its core operations. This can indicate how successful the company is at making money off of what it produces.

5. What is a good operating profit margin?

   While there is no agreed-upon number for this, having an operating profit margin of at least 15% or higher is generally considered good. It’s also important to look at previous years and compare them to the current margin.

Author

Jack Flynn

Jack Flynn is a writer for Zippia. In his professional career he’s written over 100 research papers, articles and blog posts. Some of his most popular published works include his writing about economic terms and research into job classifications. Jack received his BS from Hampshire College.