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Operating Income Definition
Operating income is an accounting concept that calculates profits received from the operations of a company. For arriving at this value, the company needs to subtract operating costs such as depreciation, COGS, wages, etc.
Operating income considers the gross income of a firm (calculated by subtracting total revenue and cost of goods sold), and subtracts operating expenses incurred by the firm. The operating costs of a business are the result of operating activities including office supplies, utilities, and many more.
A Little More on What is Operating Income
Operating income ascertains what amount of the revenues that a company earns will be considered as profits. Its concept is the same as earnings before interest and taxes (EBIT) of a firm, and are said to be the operating profit or recurring profit. Any kind of non-operating income generated by the firm is included in EBIT, while operating income doesn’t.
Operating income = gross income – operating expenses.
Operating costs cover selling, general and administrative costs, depreciation costs, and a lot more. Operating income doesn’t include amounts invested in other companies, interest expenses, taxes, etc. Also, operating income doesn’t include non-recurring activities including expenses related to settlement of legal cases. For knowing how effectively the company operates, operating income is used for ascertaining the operating margin.
Example of Operating Income
Several organizations prefer considering operating income for ascertaining the operational position of the business. For instance, Company ABC specialized in medical industry experiences an increase of 20% in its operating income, thereby making it to $25 million, in the initial two quarters of the accounting year. There was a rise in the company’s operating income and revenue as the number of patients increased during the two quarters. Because of the introduction of 2 brand new medicines for lung cancer and melanoma, there was such a huge increase in the number of patients visiting the hospital.
Another example for operating income involves Company Red that does financial reporting for the first quarter of the accounting year. While comparing the operating income with that of last year (same time period), the company experienced an increase in operating income by 37%. It is important to note the increase in operating income as the Company Red wants to collaborate with Company Blue, and shareholders will be voting on the prospective collaboration or merger next month. Even if the first quarter sales of Company Red declined by 3%, there could be still a chance that the improvement in the operating income of the firm could enable the shareholders of Company Blue to vote in favor of the merger.