Many people prefer business ownership over employment. If you are one of them, this article is for you. Here, we will discuss the difference between two of the most commonly used terms in the business or finance world: operating income and net income.
Operating income is the income earned by the company from its daily business operations minus the amount of money used to produce and sell them. It is also called “earnings before interest and taxes,” “operating margin,” “operating profit,” or “recurring profit.” Its formula is:
Operating Income = Gross Income – Operating Expenses – Depreciation and Amortization
In this formula, operating expenses include utilities, rent, wages, insurance, supplies, expenses, etc.
Operating income allows analysts to determine the profitability and efficiency of a company. It can also be used to determine the competency and flexibility of the managers, especially during tough times for the business.
On the other hand, net income is the residual profit after all expenses are deducted. It is also called the”bottom line” because it is the last item on the income statement. Some analysts call it “total comprehensive income,” “net earnings,” or “net profit.” Its formula is:
Net Income = Total Revenue – Total Expenses
Net income can be distributed to the stockholders as dividends or earnings per share (EPS) or retained by the company as its earnings. It is a great tool to measure the profitability of a firm over a specific period of time.
Operating Income vs Net Income
What, then, is the difference between operating income and net income?
Operating income is the earnings of the company from its daily business operations. It is calculated by subtracting operating expenses and depreciation and amortization from gross income. On the contrary, net income is the residual profit after all the expenses are deducted from the operating income. It can be calculated by subtracting the total expenses from the total revenue.
|Operating Income||Net Income|
|The income earned by a company from daily business operations minus the amount of money used to produce and sell them; also called “earnings before interest and taxes,” “operating margin,” “operating profit,” or “recurring profit”||Residual profit after all expenses are deducted; also called “total comprehensive income,” “net earnings,” or “net profit”|
|Operating Income = Gross Income – Operating Expenses – Depreciation and Amortization||Net Income = Total Revenue – Total Expenses|