Operating Income: Definition & Calculation

Operating Income: Definition & Calculation

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By Rickie Houston CEPF®

What is operating income?

Operating income is a value that is used to demonstrate a company’s profitability after it has deducted other costs such as cost of goods sold (COGS), employee wages and other operating expenses. This measurement also excludes both taxes and non-operating expenses. In this guide, we show you how to calculate operating income.

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What Is Operating Income?

Also known as operating profit and recurring profit, operating income represents the value of a company’s revenue after it has subtracted any operating expenses. This value doesn’t include taxes, and it indicates how profitable a company can be after deducting operational activity costs. Operating expenses might include utilities, employee wages, office supplies, insurance, depreciation and the cost of goods sold (COGS).

Operating income doesn’t include non-operating expenses such as restructuring expenses, interest, lawsuits and inventory charges. This value also commonly strikes comparisons to earnings before interest and taxes (EBIT), but the two differ in that EBIT includes non-operating income.

How to Calculate Operating Income

You can find a company’s operating income by perusing its income statement. The statement will also contain cost of goods sold (COGS) and revenue. To calculate operating income, you’ll need to first determine the company’s gross profit. You’ll determine this value by subtracting COGS from revenue. You’ll then subtract the business’ operating expenses from its gross profit to determine its operating income.

For instance, let’s assume your business made $500,000 in revenue in one month, with the following expenses:

  1. Utilities: $8,000
  2. Employee wages: $120,000
  3. Office supplies: $3000
  4. Insurance: $15,000
  5. Building/property maintenance: $18,000
  6. Cost of goods sold (COGS): $40,000

To calculate gross income, you would subtract the $40,000 in COGS from your $500,000 in revenue. This would give you a gross income of $460,000. You’d then need to subtract gross income from total operating expenses. All expenses above, except for COGS, are operating expenses. The total value in operating expenses, therefore, is $164,000. Finally, subtracting $164,000 from $460,000 gives you an operating income of $296,000.

Bottom Line

Operating income indicates how profitable a company will be after it has deducted operational expenses and cost of goods sold (COGS). This measurement doesn’t include non-operating expenses like inventory costs or interest, and it also excludes taxes. A higher operating income usually means a company will be more profitable, while a lower operating income indicates less profitability.

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