Operating income, which includes expenses less operating costs, is the income from operations less a company’s investment. In economics and accounting, operating income is an accounting measure of a company’s net profit which includes all profits and losses but excluding interest expenses and revenue tax expenses. For most companies, there is a constant, positive cash flow and profit margin from operations. There are two major factors in operating income: the operating cost and revenue per transaction.
A financial advisor will be well-versed in operating profit margin because this is often the main indicator of an advisor’s efficiency. The higher the operating profit margin, the better the financial advisor’s performance. However, it can also be a source of challenge for an advisor. There are three common operating profit margins: recurring income, year to year revenue and the current profitability.
Recurring income refers to the income that a company makes from the sale or transfer of a debt. Most banks calculate their profit on a yearly basis including interest expense and taxes. A financial advisor has to calculate the revenue generated from interest expense on a monthly basis in order to provide a viable estimate of the income generated from debt transactions. Year to year revenue is relatively easy to calculate, as it consists of the following: net income includes operating, maintenance and capital expenditures; net income includes fees paid to shareholders; and profit comes from the gross profit and net profit margin. It is relatively easier to calculate the operating cost than the recurring cost.
Net income pertains to the income earned by the company after expenses have been deducted. This means that all the money that is earned is more than the expense. Most banks calculate the operating profit by subtracting the cost of good sold from the gross sale price of the business. It then adds up the net gain resulting from net income tax expenses and adds it to the gross profit to get the operating profit. Other sources of operating income include net profit or credit revenue earned through the lending process.
Non-operating expenses are those costs that are not attributable to the performance of the business. These include costs associated with property to rent, building and grounds maintenance and advertising. A non-operating income may be generated from capital expenditures such as equipment, furniture and fixtures. It may also come from expenses incurred in recruiting and training employees, managing information systems, and procuring necessary permits. The amount of taxes payable on non-operating income is calculated by subtracting the gross receipts from the gross value of the assets. In general, the greater the non-operating income, the greater is the portion of the company’s pre-tax profit due to corporate taxes.
Income statement. The income statement reports the revenue and expenses over one-period, generally at the end of the reporting period for the reporting period ending in the last month of the reporting period. Generally, this type of statement presents the summary of the operating income and the gross and net profit. The gross profit normally includes the gross amount of revenue less the cost of good sold plus the total expenses for the sale.
Operating costs. Operating expenses consist of various charges made by the manager or the owner for goods sold, including salaries and wages to all the workers and the direct expenses made by the company to buy goods. Among these are special taxes payable to the government, costs borne by the operations of production and selling, charges for depreciation of plant and property, payroll charges and certain expenses incidental to manufacturing and selling goods. All these are deducted to compute operating income usually by the gross amount of revenue less the operating costs.
Net profit. The net profit after deducting operating expenses from sales is the residual profit. The difference between the net profit and the gross profit is called the operating profit. To calculate the operating profit, subtracting operating expenses from sales is multiplied by the total revenue product by term interest and tax on profits and multiplied by the net profit to get the actual profit after deduction of operating expenses.