Income From Operations
Income from operations, also known as operating income or operating profit, is a measure of the profit a company generates from its core business operations, before subtracting interest and taxes. It does not include profits earned from non-operating activities, such as investments or sales of assets.
You can calculate income from operations using the following formula:
Operating Income = Gross Income – Operating Expenses – Depreciation – Amortization
Here’s what these terms mean:
- Gross Income : This is the company’s total income from sales or services before any costs or expenses are subtracted.
- Operating Expenses: These are the costs related to the company’s core business operations, such as rent, salaries, utilities, and marketing.
- Depreciation and Amortization: These are non-cash expenses that reduce the value of the company’s long-term assets, such as buildings, equipment, and intellectual property.
Operating income is a valuable measure of a company’s profitability because it focuses on the profits that the company is able to generate from its core business operations, excluding more variable factors like interest costs, tax expenses, or one-time items. This can make it a more consistent and reliable indicator of the company’s ongoing profitability.
Example of Income From Operations
Let’s consider an example of a fictional manufacturing company named ABC Corp.
Let’s say in the fiscal year 2023, ABC Corp has:
- Revenue (sales) of $5,000,000
- Cost of Goods Sold (COGS) of $2,000,000
- Operating expenses (like rent, salaries, and utilities) of $1,000,000
- Depreciation of $200,000
- Amortization of $100,000
First, we need to calculate the gross income, which is Revenue – COGS:
$5,000,000 (Revenue) – $2,000,000 (COGS) = $3,000,000 (Gross Income)
Then, we subtract operating expenses, depreciation, and amortization from the gross income to get the income from operations:
$3,000,000 (Gross Income) – $1,000,000 (Operating Expenses) – $200,000 (Depreciation) – $100,000 (Amortization) = $1,700,000 (Operating Income)
So, ABC Corp’s income from operations for the fiscal year 2023 is $1,700,000. This is the profit that ABC Corp generated from its core business operations, before subtracting interest and taxes.
