What Is Operating Income?
What Is Operating Income?
Operating income is a figure used by accountants to obtain the true profit from business operations. It is found by deducting operating expenses like salaries or overhead from cost of goods sold (COGS). A restaurant's operating expenses can include utilities, supplies, food and beverage costs, and more.
When looking over an income statement of any business, revenue and expenses are the two standout items. Revenue comes from sales of a product or service. Expenses are those payments that need to be made to continue business operations. Business expenses can often be broken down as either fixed or non-fixed.
Operating income on an income statement is where financiers look to determine how competent and efficient the management of business operations.
There can be varied external factors that impact sales revenue, any changes to the operating income highlight how efficiently those changes were managed. Therefore, it's good to keep a close eye upon operating income.
Understanding Operating Income
Operating income can be compared to earnings before interest and taxes, or EBIT. It measures how much of the revenue from the restaurant will become profit. However, EBIT will include non-operating income which the final calculation for operating income will not.
It's also important to relate that operating income and net income (also called gross profit) are two different things. Operating income will include line items of expense where net profit only includes production costs.
How To Calculate Operating Income?
Maintaining financial health for a restaurant comes with understanding operating costs, profit margins, budgets and other financial reports. If the restaurant is seeking additional capital from investors, having balanced financial statements is of utmost importance. Operating income should be calculated among those numbers.
Calculate Operating Income
The operating income of any restaurant can be found on the income statement. On the very top it will read the cost of goods sold (COGS) minus the revenue that came in from business operations. Next, the operating expenses will be listed. These are subtracted from the gross profit to reveal the operating income.
The formula to calculate operating income looks like this-
Operating Income = Gross Income Operating Expenses
Gross income refers to the revenue that remains after subtracting production costs, or costs of goods sold.
Revenue - COGS = Gross Income
Operating expenses are a round up of any costs that comes from running the restaurant. This can be employee wages, rent, insurance or food cost.
What Does Operating Income Show?
Operating income is a financial measure of how profitable a company is. Higher operating income means it is more profitable than others. Most business owners will apply the operating income figure to understand how successful the operations are.
Many things can impact operating income. Food costs, labor costs, and other restaurant expenses are all impactful on income. The expenses that are directly related to day-to-day operations can be strategically changed to raise operating income.
Why Is It Important?
A restaurant should calculate its operating income to keep separate operating and non operating monies and expenditures. It provides a clearer image of the company that investors and creditors can look over.
When the operating income is high, the restaurant is more likely to pay debts on time. This makes an investor more likely to put money into that restaurant. An income statement alone won't tell all the facts. Having a deeper look at the operating income gives a clearer picture of the overall health of the restaurant on a continued basis.
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Conclusion to Operating Income
- Operating income is calculated by subtracting operating expenses from cost of goods sold (COGS).
- Restaurant owners should be calculating operating income to separate revenue and expenses. This will create a clearer picture of net profits.