Operating income is the income of a corporation minus operating costs, cost of labor and other basic business expenses.
Companies are in the business of making a profit. They show this by tracking their cost of doing business and demonstating that revenues have exceeded those costs.
Operating income, then, is the basic math that shows that the company did or did not earn a profit. It usually is stated in three-month periods and again annually.
There are additional costs, such as taxes and interest expense, that are substracted afterward.
Deriving operating income first gives managers and investors a sense of how well the business is going as a business, known as operating margin.
You probably know what your basic expenses are for living. You work and earn a paycheck and expect that income to cover your cost of living, plus a little extra to save and invest.
Sometimes, though, there are costs that surprise even a the most careful planner. An unexpected illness, a surprise home repair, a delayed tax bill.
Companies are no different. They must be sure that the business they are in — whether is designing clothes, importing food or selling technology — is actually a business.
Managers must demonstrate a recurring, safe margin of profitability.
The company’s management and board might decided to invest some of those proceeds back into the business or into a second venture.
The company might owe a tax bill or have some other extraordinary cost.
Does that one-off expense really affect the viability of the business itself? Probably not.
Showing operating income allows investors to understand the long-term ability of a business to keep operating and, in time, generate a steady stream of profit.
Managers, too, need to know if they company is losing ground in its own market, or might need new investment to remain in business.
Operating income over time is the key to understanding the health of the business itself.
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