Operating Income Definition & Meaning Formula Examples

Operating income, often referred to as operating profit or operating earnings, represents the financial gain a company generates from its core operations. It is a fundamental measure of how well a business performs in its day-to-day activities, excluding non-operational revenues and expenses. Operating income—also called income from operations—takes a company’s gross income, which is equivalent to total revenue minus COGS, and subtracts all operating expenses.

Would you prefer to work with a financial professional remotely or in-person?

Operating income is generally defined as the amount of money left over to pay for financial costs such as interest or taxes. This is the total cost of sales or services, which can also be thought of as the cost incurred to manufacture goods or services. Net profit is the profit remaining after all costs incurred in the period have been subtracted from revenue generated federal tax credits for consumer energy efficiency from sales. Expenses that factor into the calculation of net income but not operating profit include payments on debts, interest on loans, and one-time payments for unusual events such as lawsuits. Net income also includes all expenses and revenue that are seen in operating income such as gross income, depreciation, sales expenses and administrative expenses.

How Do You Calculate Operating Profit?

Calculating operating income can also help separate operating expenses from non-operating expenses. Operating expenses refer to the charges attributed to the day-to-day core operations. It is beyond the costs of goods sold and further divided into direct and indirect costs. Net Operating Income (NOI) is a measure of profitability that represents the amount the company has earned from its core operations and is calculated by deducting operating expenses from operating revenue. It excludes non-operating expenses such as loss on the sale of a capital asset, interest, tax expenses, etc.

Cost-volume-profit analysis

Operating profit margin is the ratio of operating profit to total revenue, and it is used to measure a company’s profitability and efficiency. Operating profit can give you insight into how well a company is run and whether or not it is profitable. It can also help you compare different companies to see which is more efficient. Additionally, operating profit margin is a key metric for investors and creditors when considering whether or not to invest in or loan money to a company. However, from an investor’s perspective, operating profit is often a more useful metric because it excludes items that are not directly related to the company’s core operations.

• Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching.
• Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader.
• Suppose ABC’s operating income was $2 million for the previous quarter and -$10,000 for the next one.
• The income statement structure tends to list items from the most inclusive (total revenue) down to the most exclusive (net income), so operating income will be somewhere near the top.

Operating profit is essential because it measures the profitability of a company’s core business operations or the main way that a company generates revenue. Changes in operating income can directly affect a company’s profitability and financial position. Thus, tracking changes in operating income is important for monitoring a company’s financial health. In essence, if your net income is reducing drastically, then the company’s productivity will decline.

Better Managerial Decisions

In the below-given table is the data for the calculation of EBIT using both the formula mentioned above. Access and download collection of free Templates to help power your productivity and performance.

Non-GAAP earnings are an alternative accounting method that varies from the Generally Accepted Accounting Principles (GAAP) that U.S. firms are required to use on financial statements. When managed correctly, increasing operating profit can be a helpful way to grow a company’s bottom line. While analyzing operating income, it is important to remember that it differs between industries. Because of their dynamics and production process, some industries are more capital intensive as compared to others. Using the EBIT (Earnings Before Interests and Taxes) method, you add the net earnings to the deducted interest and taxes.

The standard price in this equation is the price which you originally expected to pay per unit of direct materials. The standard quantity is the quantity of direct materials that you expected to use. The actual quantity is the amount of direct material that you actually used during production. This shows you how a sudden change in the value of direct material affects the total cost.

Accounting software such as QuickBooks, Xero, FreshBooks, and other QuickBooks alternatives can help businesses calculate their operating income quickly and in real-time. If there are revenue sources other than the core operations of the business, then you must exclude those items. The increasing trend in this number of operating income indicates that there is more scope for the company to grow in the future and vice versa. Creditors and investors always want to deal with the increasing trend of the company as the possibility of getting a higher return is higher in that type of business.

Operating income is a financial metric used in managerial accounting to evaluate a business’s profitability. It is also referred to as earnings before interest and taxes (EBIT) and is calculated by subtracting operating expenses from a business’s gross revenue. In this blog post, we will explore the concept of operating income, how it works, and its importance in managerial accounting. Operating income, also referred to as operating profit or Earnings Before Interest & Taxes (EBIT), is the amount of revenue left after deducting the operational direct and indirect costs from sales revenue.