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Calculating Net Operating Income

by gbaf mag

In business and accounting, net operating income is the income of an organization minus expenses, depreciated asset depreciation, interest and taxes for a period. Net operating income in the current business cycle begins with the first day of operations or first sale of products. Net Operating Income is the revenue less expenses less net earnings. The purpose of this article is to provide a simple explanation of net operating income.

In business, operating margins are important to any business. A good operating margin can help maintain a business’s share price from competitors. A business with a good operating margin is a company that has positive gross profit margins and average selling prices. It also means that the percentage of total sales that went to expenses is higher than the total revenue. For example, a business operating at a net income of ninety-five percent will have positive gross profit margins.

Net Operating Income may be confusing. To understand it we should first consider the difference between net operating income and net operating profit. Net operating income includes the expenses associated with stock repurchases, advertising, property taxes and depreciation. The expenses do not include the actual purchase of the stock, but does include the cost of doing business. A company with a net profit will receive an income statement at the end of the year and will show the difference between its net income and its expenses.

A company with a good operating margin will have higher net profits than a company with a poor operating margin. How is this difference determined? A company’s net operating income will usually be higher if it charges a higher price for its products or services. The price is usually based on supply and demand, where the cost to produce the item dictates the price. If you buy a car at a dealer with a low price, you may still be able to get a good operating margin.

A company with high operating revenue will usually have a lower net operating income. This difference is based on how the revenue is earned by the business. High revenue generating businesses may have overhead that a business in its lowest segment could not afford. A company with a large gross profit margin may have reduced the amount of expenses incurred to earn that profit, which could make its net operating income appear higher.

Net Operating Income usually reflects the operating expenses and gross profit of the business. Most companies use one or more of the following methods to calculate their net operating income statement: Many companies divide the net operating income by the gross profit or the gross revenue less the cost of goods sold. Other companies separate the gross profit into the selling and administrative expenses. Other companies use a percentage system of determining the gross profit. Regardless of the method used, all businesses must document and track their specific expenses in order to properly calculate their net operating income statement.

The gross margin, the difference between actual sales and average cost, is another factor included in calculating net profit and operating income. It is calculated as the difference between the net income and the gross profit. The gross margin reflects only part of the costs incurred by the business. A company’s gross profit plus the administrative expenses represent the entire net profit or operating income. Because the gross profit and net profit and the net income statement are generally different, it is wise for business owners to consider what proportion of their net profits or operating income goes to the two statements.

The gross profit and operating margin are not the only factors included in the calculation of a company’s net profit and operating income. Some business owners focus on the growth of their business, comparing the pre-profit to the post-profit. In order to determine whether or not the business is profiting, it is important to compare the net profit and operating profit or the net operating income with the gross profit. Depending on the situation, the owner may want to include one or the other but not both. A business owner should understand that when he or she omits one of the items on the business’s balance sheet, the company will still be reported as having a positive cash flow.


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