In this article, we’re answering “What is operating income?”
This article is part of our free series on registering LLCs in the USA, including the steps for opening a business bank account for an LLC, which you can access here.
Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- What Is Operating Income?
- Operating Income vs Net Income
- How to Calculate Operating Income vs Operating Expenses
- Frequently Asked Questions
- Do You Want Help Opening a US Bank Account?
What Is Operating Income?
Operating income refers to how much profit a business generates from its operations after deducting operating expenses. In general, operating expenses include the inputs required to operate a business and produce the products or services being sold. These expenses include the costs of goods sold, salary and wages, equipment and office expenses, utilities, and more.
In the following sections, we will look at how operating income compares to other key metrics. Of course, we will also share how to calculate operating income and we will answer common questions we receive on the topic.
Alternatively, if you’re looking for information on the types of forms you need to submit to the IRS, such as a 147c Letter, you can use our free guide, linked here, that shares details on how to obtain the form, complete the form, and submit the form to the IRS.
Depending on where your company is registered and where you are looking to open a bank account, other forms of documents may be required, including a certificate of good standing.
Operating Income vs Gross Profit
The main difference between operating income(OI) and gross profit (GP) is that operating income deducts additional expenses like salary, wages, utilities, equipment expenses, and other direct operating expenses from a business’ earnings while GP only deducts the direct costs of goods sold from a business’ income. In other words, OI is a more detailed look at a business’ expenses when compared to gross profit.
Operating Income vs Net Income
The main difference between OI and net income (NI) is that operating income reflects a business’ profitability after only deducting operating expenses while net income is a business’ profitability after deducting all expenses. In other words, OI can tell you how efficient a business’ operations are at generating profit while net income can tell you how profitable a business is overall.
How to Calculate Operating Income vs Operating Expenses
To calculate OI vs expenses you will need to calculate (1) the gross profit of a business and (2) the total operating expenses of a business.
(1) Gross profit refers to the earnings that a business generates less than the direct costs of goods sold during the period. Depending on the products being sold, the COGS will include the variable costs of materials, labor, overhead, etc., for every unit sold during the period.
(2) Operating expenses refer to the expenses that are incurred through operations. These operating expenses include equipment expenses, salary and wages, sales and market, rent and utilities, and more.
OI is therefore the result of subtracting expenses from GP, which we detail below.
Operating Income Formula
[Total Revenue] – [Costs of Goods Sold] = [Gross Profit]
[Gross Profit] – [Operating Expenses] = [Operating Income]
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Frequently Asked Questions
Below are two of the most common questions that we receive from people looking into what operating income is. If you have further questions you would like answered, don’t hesitate to get in touch with us directly.
What Is Meant By Operating Income?
It is the earnings generated by a business after deducting the costs of goods sold and the expenses of the business. In other words, it’s the gross profit of a business less any of the expenses required to operate the business. Importantly, OI does not reflect the overall profitability, which would require an assessment of the business’s net earnings.
How Do You Calculate the Operating Income Formula?
It is the result of subtracting direct costs of goods sold and operating expenses from the total revenue of a business. That said, this formula can be divided into two parts, first, the calculation of GP followed by the calculation of OI.
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