What is Operating Income
This is an accounting term it denotes the profit earned by any company for a given financial period. This will not include expenses or payments made on investments, interest or taxes. Sin simple term it is revenue earned minus other operating expenses, this expense will also include depreciation on assets. It is also a term used for EBIT (earnings before interest and taxes).
The operating income helps an organization to determine how the companies’ as well as their stake holder’s growth is moving. The two important things that are required to calculate the operating income are: the operating revenue and the operating expenses. Operating is that revenue that comes from any kind channel except for taxes and interest; sometimes it also excludes dividend income as well. Operating expenses are those that are incurred in the day to day running of the company, which includes general expenses.
If any organization is having declining operating income then there will less revenue with the firm’s stake holders. This in turn will lead to fewer investments, less expansion of firm’s business etc. Hence these are closely watched by money lenders and stake holders, if this dry run continues these people may lose interest in such companies and may move out other firms.
To measure the efficiency of an organization there is something called the operating margin. This helps in making a comparison of the quality of a firm’s activity with its competitors. This helps to know more accurately the profit of a firm at any given point of time. This implies that a company having a higher operating margin than its competitors is doing business profitably.
Let’s see that steps involved in calculating operating income:
Ascertain the gross profit; this can be taken from the income statement. It should be noted that this should include all the revenues of the business for a particular accounting period. This is generally arrived by subtracting the cost of goods sold from net sales.
Let’s calculate the total operating expenses: this information can be found from the balance sheet, this should include all expenses like vehicle expenses, advertising, office rent etc. Now subtract operating expenses from the gross profit that was calculated earlier.
The last step is to post this profit in the income statement, this is posted under the heading operating revenues and operating expenses. It should be noted that this is before the tax and interest deductions. An operating income denotes how expensive it is to run and maintain a company. This type of calculation is used for both small and big organizations to know if the company is moving towards profit maximization.