In our previous article, we covered the fundamentals of operating income. Now, let's take a deeper dive into this crucial financial metric and learn how to calculate it for your business.
To calculate your operating income, follow these straightforward steps:
Now, let's break down the components of this formula.
Gross income is the total revenue generated by your business before any deductions. This includes all sales, fees, and other sources of income.
Operating expenses refer to the costs associated with your daily business operations. This includes expenses such as rent, utilities, salaries, and marketing expenses.
Depreciation and amortization are non-cash expenses that account for the decrease in value of assets and the gradual writing off of intangible assets, respectively.
Examples of intangible assets include trademarks, patents, copyrights, and franchise agreements. Unlike tangible assets, these assets typically do not hold any resale value at the end of their useful life.
Let's look at a few examples of operating income in different business scenarios.
Sarah owns a small bakery that specializes in creating wedding cakes for couples in the Boston area. Her business is growing, and she wants to move to a bigger location and purchase a new space.
With an operating income of $39,200, Sarah can show the bank that her business is profitable, increasing her chances of securing a loan for the new location. Here's how Sarah calculated her operating income:
Gross Income: $100,000
Operating Expenses: $50,000
Depreciation and Amortization: $10,800
Operating Income: $100,000 - $50,000 - $10,800 = $39,200
Google, the popular search engine, consistently maintains a high operating income over the years, indicating its profitability.
Operating income is a crucial measure of your business' financial health. It shows your company's profitability and its ability to generate positive cash flow.
A higher operating income indicates greater profitability in your core business operations.
By regularly calculating and monitoring your operating income, you can gain valuable insights into your business' financial standing and make informed decisions to improve its performance.
