Operating Income vs Revenue: What’s the Difference

Companies use different methods in calculating their measure of success based on their business. In doing so, they can determine some common indicators, including operating income and revenue. 

Although all these calculations provide information about the company’s profits, they also include and exclude various numbers used to assess its financial status and overall company health. 

So today, we’re going to explain the differences between operating income and revenue and what you need to know to determine your company’s financial standing.

Operating Income

Operating income is an expression of company income that only considers operating costs. They are also called operating income. 

Operating profit can help a company understand how successful its business is without additional income from independent sources of income or expenses (such as taxes or loan interest). Generally, business expenses include the following items: 

  • Health insurance and other benefits
  • Marketing and advertising materials 
  • Office supplies
  • Utilities
  • Payroll
  • Rent

There are a couple of ways you can calculate your business’s operating income. Let’s take a moment to look at the methods you can use in your own company.

Revenue – Operating Expenses

Revenue is your company’s total sales minus returns. One way to calculate operating income is to use this formula. Look over your total income on your income statement (usually the first row). Then, subtract all of your operating expenses from that figure.

Gross Profit – Operating Expenses

Gross profit is simply your business’s total revenue minus the cost of goods sold. Total sales include all of your company’s revenue, not just sales revenue. The “cost of goods sold” refers to all costs directly related to the manufacture of a product or service. 

Using this formula, calculate your gross profit margin and subtract operating costs from it. Many companies use annual income statements to calculate and compare their business performance every year. 

Others prefer to calculate operating profit more frequently, such as quarterly or monthly. As long as you have the correct data, you can calculate the operating profit for any period.

Net Income/Revenue

Net income refers to the total profit remaining after considering all distribution costs and other expenses. Commonly referred to as your “bottom line” or “revenue,” net income is usually the last line of your business’s income statement. 

This means that in addition to considering operating expenses, net profit also represents all other expenses to determine how much your net profit is. 

Subtract any non-operating expenses from operating income to calculate net income. This means that you must calculate the operating profit before you can determine the net profit. Non-operating expenses can include the following items:

  • Litigation expenses and settlements
  • Reorganization of company
  • Interest payments
  • Inventory 
  • Taxes

The final net income that you figure is your company’s total profits. As with operating income, you can determine net income for any month, quarter, or year using this calculation.

The Differences

Although net income and operating income both show you the bottom-line rate of your business’s earnings, the formulas outlined above serve to measure unique aspects of your company. 

For instance, operating income shows the success of your company’s operations and production. Some companies may have large loans and high interest rates that affect their bottom line. 

In any case, business operations might still be very successful. Operating income can help you and your stakeholders understand the effectiveness of most businesses without determining other expenses or income. 

Conversely, the net income shows your company’s total profit after considering all costs of sales. This number will help you and your stakeholders understand whether your business is profitable after paying all bills, fees, and taxes. 

What’s more, it doesn’t show your company’s operating performance but provides a simple profit estimate instead.

What About Net Operating Income?

Net operating income is the profitability of a property that generates income. Commonly used in the real estate industry, this term applies to any company or business that generates income from a property. 

To find the net operating income in your business, you need to calculate all the income for the property and subtract the associated operating costs. Property income includes elements such as:

  • Laundry
  • Renting 
  • Parking 
  • Selling 

Additionally, business expenses related to real estate typically include things like: 

  • Personnel payroll
  • Maintenance
  • Insurance 
  • Repairs 
  • Utilities 

You don’t include investments in the purchase of new equipment or the modernization of a heating system, for example, when calculating your business’s net operating income. 

Moreover, you can calculate the net operating income for any period, but most of the time, you would perform it annually.

Companies outside of real estate management often refer to net operating income as EBIT (Earnings Before Interest and Taxes). 

In its calculation, EBIT considers the same types of income and expenses as the operating result without retention of title.

Valuable Resources

Calculating corporate income rates may require many documents and resources. When you’re ready to determine your net operating income, operating income, or net income, collect the following information to assist you:

  • Property management documents
  • Income statement
  • Loan paperwork
  • Tax documents

Property Management Documents

The category of operating expenses when calculating net operating income may vary from company to company. It depends on the type of property and the facilities included. 

Reviewing contracts and administrative documents helps ensure that you have considered all expenditures and income streams.

Income Statement

Your business’s income statement is a helpful tool for figuring three income indicators. The income statement is a document that records your company’s profit and loss in a specific period. 

The income statement must include all the figures needed to calculate operating income and net income, including itemized operating expenses, revenue, interest payments and taxes, and non-operating expenses.

It’s worth noting that your income statement is one of your company’s most important annual financial statements, as it shows both your profits and losses for a specific period. 

You can determine profits and losses by deducting all income and expenses for commercial and non-commercial activities. 

Moreover, the income statement is one of three reports used in corporate finance and accounting. The report shows your business’s sales, costs, gross profit, sales, and administrative expenses, various other income and expenses, paid taxes, and net income consistently and logically.

As you look over your income statement, you will see that it is divided into periods that logically follow your company’s activities. The most common repeating breakdown is monthly (for internal reporting), although some companies may use 13 periods. 

This report is a good starting point for the financial model because it requires minimal cash flow statements and balance sheet information. 

Therefore, in terms of information technology, the income statement precedes the other two main invoices.

Loan Paperwork

As with your tax documents, your income statement may not include details of interest payments so that you can quickly calculate your income, how much interest you will pay, and which loans will affect your income calculation.

As such, you’ll need to refer to your other documents to aid you in collecting accurate data about your business.

Tax Documents

Depending on the layout of your income statement, you might need to consult your tax returns or other documentation to help you find the correct data for certain net operating income and net income calculations. 

For instance, say you want to know how much you paid in property taxes alone and no other taxes when you factor in your total operating costs. You’ll need to refer to other sources of documentation to determine an accurate figure.

Parts of Income Statements

Before we wrap up, let’s briefly continue our discussion on income statements, as there are some essential aspects to consider—the following information details what you’ll find on your income statement.

When you understand these sections, you’ll have a much easier time reading your statement and calculating your income and revenue.

  • Marketing, Advertising, and Promotion Expenses
  • Depreciation and Amortization Expense
  • General and Administrative Expenses
  • Cost of Goods Sold (COGS)
  • Operating Income (or EBIT)
  • EBT (Pre-Tax Income)
  • Other Expenses
  • Revenue/Sales
  • Income Taxes
  • Gross Profit
  • Net Income
  • EBITDA
  • Interest

The United States Securities and Exchange Commission has additional information on income statements to aid you in your research. This beginner’s guide also features other handy topics related to company finance. You can see this and more by clicking here

In Closing

Now that you understand the differences between operating income and revenue, it should be easier for you to manage your business expenses. Knowing these differences is essential in running a business and will help ensure that you keep spending under control.

Whether you’re a seasoned business owner or just starting out, it’s not uncommon to experience financial difficulties. Fortunately, you have loan experts who can help you get the funding you need to ensure your business’s financial stability and longevity.

 

Sources:

Frequently Asked Questions Regarding the Use of Non-GAAP Financial Measures | SEC.gov

EBT – Electronic Benefit Transfer | Connectebt.com

Beginners’ Guide to Financial Statement | SEC.gov

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