Operating Income: Definition, Formulas, and Example

This calculator helps determine the operating income based on total revenue and operating expenses, allowing businesses to assess their operational efficiency. Since the operating income of a company is capital structure neutral and not impacted by non-operating costs – e.g. interest expense and taxes – the operating profit metric is widely used in corporate valuation. Investors and business owners use operating income to check financial health, cost control, and profitability. Operating income includes most of the costs of doing business but it disregards other income, non-operating income, and non-operating expenses. Thus, the net operating income of the property is equal to the gross income minus the vacancy and credit loss minus the operating expenses.

It’s the key metric that separates profitability from pure cash flow. Operating income might sound like just another accounting term, but it’s one of the clearest indicators of how well your business is actually performing. What good is income if your expenses are eating it alive? However, it does not take into consideration taxes, interest, or financing charges, all of which may reduce its profits. Operating income is similar or identical to earnings before interest and taxes (EBIT).

• A well-thought-out budgeted income statement can show any potential investors what your company’s expenses and profits will likely be in the coming months and year.
• More importantly, it tells you how much money is entering and leaving your business.
• Ramp’s accounting automation software gives you complete control over company spending before, during, and after every transaction.
• After deducting these costs, its operating income stands at $3 million.
• For instance, EBITDA considers the cost of intangible asset amortization or interest on loans, which are ignored in NOI calculations.

Although a business can survive on a low profit margin, it doesn’t put you in a good position. In some cases, a low profitability margin is nothing to panic about. Traditionally, it only considers direct earnings and not other profits your business generates (through investments, for example). Gross income refers to how much money your business earned during that particular month. When you’re first starting out as an entrepreneur, it can be easy to see all the revenue coming in and think you’re set when it comes to profits. Based on publicly available financial information the EBIT (in dollar terms) of Apple Inc. can be calculated for budgeted operating income formula the accounting years 2016 to 2018.

This resulted in an operating expense of $2100. The result number means that if John had to pay $4400 due to vacancy loss, his actual take-home pay would be -$4400, indicating he is operating at a net loss. The vacancy loss of $7,384 means that if the property is only occupied by 71% (100% – 29%) of its potential capacity, the owner would lose $7,384 per year due to unrented space. The annual rent from this property is equivalent to its entire market value. Unfortunately, the insurance company failed to cover all the damages.

The image below represents Apple Inc.’s income statement for the three months ending March 29, 2025. Gross revenue is the total amount of money taken in by a company for a given period. In this formula, net revenue is used in case there have been product returns or other deductions to make to gross revenue. Operating expenses are the selling, administrative, and general expenses necessary to operate a business, though this does not include interest or taxes.

Operating income includes both COGS or cost of sales as well as operating expenses (highlighted in red above). The bottom line of the income statement is the net profit or loss, depending on if your revenues are more or less than your expenses. In the final step, we’ll subtract Apple’s total operating expenses – R&D and SG&A – from its gross profit. The operating margin is the ratio between a company’s operating income and its revenue generated in the corresponding period, expressed as a percentage.

Operating Income vs. Other Income Measures

Operating expenses include selling, administrative, and general expenses. Cost of goods sold are the expenses directly related to manufacturing a product and include labor, raw materials, and overhead allocated to items sold.

How to Calculate Operating Income

You’ve got a snapshot of a company’s profitability without the clutter of non-cash expenses. All these expenses need to be subtracted from gross income to find operating income. You start with your gross income, which is basically your total sales revenue. Operating income represents a company’s profits generated from its core business operations. The higher the operating income, the more likely the company will be profitable and able to pay off its debt.

Potential Gross Income Formula

Real estate professionals use net operating income (NOI) to determine a property’s profitability. Also called a ‘profit and loss statement,’ or ‘p&l,’ the point of a company’s income statement is to show how you arrived at your net income. Gross income, operating income, and net income are the three most popular ways to measure the profitability of a company, and they’re all related too. The budgeted income statement serves as a roadmap for the company’s financial performance and is used to monitor and compare actual results throughout the budget period. Gross income, also called gross profit, is calculated by subtracting the cost of goods sold from the net sales.

How do budgeted income statements help investors?

It spends $300,000 on inventory purchases and another $250,000 on operating expenses like rent and advertising. Using sales software to track and categorize revenue and expenses can lead to more accurate calculations. It spends $200,000 on inventory and $150,000 on operating expenses such as wages and rent. While EBIT paints a broader picture, operating income focuses purely on required processes and ignores non-operating activity. Operating income, however, focuses purely on the core business, excluding any non-operating activity.

“You have to spend money to make money” is the old adage that the budget income statement often verifies. This type of statement also forces you to consider any potential pitfalls or added expenses that may come your way and plan for them so they don’t put your company at risk. This helps justify their spending and expenses because of the positive net income generated for the company. In this budgeted income statement example, Company ABC estimates they will earn a net income of $9,480. Companies that make use of these income statements for budgeting usually create them at the beginning of the fiscal year to help create a realistic forecast for all four quarters. •   Using this statement to list projected revenues and expenses and specific performance targets may help you attract investors.

• What good is income if your expenses are eating it alive?
• Operating income is similar or identical to earnings before interest and taxes (EBIT).
• However, operating income does not include items such as other income, non-operating income, and non-operating expenses.
• If you already know your gross income and operating expenses, you can use this tool to quickly get your operating income.
• Keeping these costs under control ensures more of your revenue turns into profit.
• An operating income formula shouldn’t include estimates, but hard numbers.

From the above table, we can see that the EBIT of Apple Inc. in dollar terms has been growing during the period, which is a positive sign for the company. Calculation of Operating Income using the Second formula. Similarly, we will calculate the EBIT for  Sep 30, 2017, and  Sep 24, 2016 Calculation of Operating Income using the first formula. In the below-given table is the data for the calculation of EBIT using both the formula mentioned above. Now, we will calculate Operating Income using the second method mentioned above.

Yes, they’re thick as a brick, but they include financial statements. Think of it as peeling away costs that aren’t directly related to everyday operations. In one particularly profitable weekend, our ambitious lemonade mogul makes $500 in sales.

Preparing a Budgeted Income Statement

As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy. These costs are frequently accumulated into a fixed or overhead cost and allocated to various operational activities. The costs can be fixed or variable but are dependent on the quantity being produced and sold.

Gross profit is the net profit earned after the cost of goods sold is subtracted from net revenue. It means that the company’s management is generating more revenue while controlling its expenses. Let’s start by calculating the gross annual income by multiplying the rent by 12. These include property taxes, insurance, utilities, maintenance, repairs, and property management fees.

Inform and Attract New Investors

Operating Expenses exclude Income taxes, losses from the sale of assets, interest expense, etc. Gain hands-on experience with Excel-based financial modeling, real-world case studies, and downloadable templates. Master the fundamentals of financial accounting with our Accounting for Financial Analysts Course.

This means the company’s core operations brought in $150,000 in profit before considering taxes, interest, and other non-operating costs. Operating income focuses on the profitability of your main operations by including revenue from sales and excluding non-operating revenue and expenses. It’s calculated by subtracting operating expenses (such as wages, rent, and utilities) from the total revenue generated by your business. Operating income is what is left over after a company subtracts the cost of goods sold (COGS) and other operating expenses from the revenues it receives. If a company does not have interest expenses, tax expenses, or other non-operational costs, it is possible for a company’s operating income to be the same as its net income. Operating income shows how much of a company’s revenue will eventually become profits considering how much it costs to run the business.

It is essential to differentiate between net operating income and gross operating income. Your income statement, balance sheet, and visual reports provide the data you need to grow your business. Business owners need to create an income statement, which is one of the three main financial statements. In that case, you likely already have a profit and loss statement or income statement that shows your net income. This gives them a better idea of how profitable the company’s core business activities are. Operating income is another, more conservative measure of profitability that goes one step further than gross income.

There are many ways in which property investors can lower costs. When we talk about the profit a rental property provides an investor, we refer to its NOI minus debt service payments, depreciation, and income tax. NOI does not consider debt service payments, depreciation, and income tax, which appear in the profit and loss statement. Operating expenses include property management fees, property taxes, insurance, and sums spent on regular repairs and maintenance. Gross operating income includes the rent paid by tenants as well as income from sources like parking fees and concierge services.

It allows you to track spending and understand how much revenue is needed to stay profitable. This method works well if your business focuses on revenue growth. It gives you a clear view of profitability by breaking down earnings from the top. Large corporations analyze it every quarter, while small businesses may review it annually or during key financial planning periods.