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Operating Income: What Is It?

by Jackson B

Operating profit for any business will show you the difference between your total income and your cost of good service to customers. Owing more to the non-operating costs than to the income earned, operating profit is a misleading measure of profits. Operating income doesn’t include any other sources of income, like gains from exchanges or investments. While non-operating profit is usually caused by one-time transactions, operating profit usually recurs from year to year.

A business’ operating income normally consists of net sales less net expense. The difference between revenue and expense is operating income. The larger the difference between these two numbers, the less a company’s net profit will be. Net sales are lower because of the greater amount of a company’s revenue is generated by the selling of products than its expenses.

Net operating income can be influenced by many factors, including the quality of the customer service supplied, the profitability of a business and the cost of doing business. Among these factors, one that has a profound impact on operating income is the quality of the revenue. For example, a product may be selling at a very high price but generate only a small percentage of its overall revenue. The profit made from this sale would be small and not provide a significant increase in operating income. If the same product could have been sold at a lower price, it would have provided a much larger increase.

Cost of good service and goods sold are included in determining operating income. In most cases, goods are sold more cheaply than operations costs. It is impossible to make a profit without sales or operations. Thus, all changes in cost of good or services sold are reflected in operating income.

Changes in the operating profit margin, which is the difference between the value of the company produced and the total cost of producing it, are included in measuring operating income. The definition of the operating profit margin is the difference between the net income earned by the company and the total operating expenses, less the profit made by the company. Companies that produce fewer items that compete with other businesses are able to obtain higher margins. These companies can also have higher operating income because they produce fewer items that are in demand.

Non-operating income looks into two categories of expenses other than the operating income. One category is interest and the second category is general revenue. Interest consists of the expenses for borrowing money. General revenue consists of government grants and dividends received from stock certificates. The difference between the two categories is the portion of the expenses that are non-tradable and which is amortized over a period of time. Non-tradable expenses are those that are incurred for plant and equipment, capital expenses, property, and payroll.

When calculating non-tradable operating income, the year to date net income and the current year’s net income are used. The current year’s net income is determined by subtracting the prior year’s net income. Also included are all costs associated with producing and marketing the product. The non-tradable portion of the expenses is then reported under revenue item 4 on the statement of income. Other items include gross selling expenses, marketing expenses, and promotional expense.

Taxes are a major component of operating income. The tax year starts with the filing of the federal income tax return and ends with the filing of the corporate tax return. The amount of taxes depends upon the filing status of the individual and the classification of the business. The tax system in America is based upon the concept that a company pays taxes according to its income and profits. Profits and losses are calculated by subtracting expenses from net revenue.

A major part of the operating income is made up of the primary operations. These include sales of products, service, and brand name. Net revenue and gross profit are the results of these primary operations.

Net operating income is obtained from two components, the cost of goods sold and the cost of services bought. The gross value of the product sold is subtracted from the gross value of the services bought to determine the difference between the cost of goods sold and the cost of services bought. This difference is the operating income referred to in the accounting principles as the cost of sales or cost of services. Interest and other operating charges are also included in operating income. Net operating income is calculated by adding gross revenues, gross profits, net sales, and expenses and dividing the total by the net operating income.