Net Income vs Operating Income

Every entrepreneur requires a fundamental understanding of business finances if they want to maintain a profitable and prosperous venture. Otherwise, they run the risk of overlooking critical business expenses or spending beyond their means.

In fact, 36 percent of small business owners report that cash flow management is a challenge and 82 percent of all business failures are a result of poor cash flow management.

One of the greatest financial impediments business owners have is failing to understand the difference between net income VS operating income.

So, in today’s post, I’ll be breaking down these two terms and sharing some useful tips for managing both.

But first, let’s take a closer look at the definitions for each.

What is net income?

Net income (or NI) is the amount of revenue a business has earned within a given timeframe minus all expenses during that same period. 

These expenses can include, but are not limited to, the following: 

  • Interest and taxes

  • Insurance costs

  • Salaries, wages, and benefits

  • Costs of goods and services

  • Rent or property leases

  • License fees

  • Legal expenses

What is operating income?

Operating income is the amount of revenue a business has earned after operational expenses have been accounted for. Operating income does not include many of the income streams that net income can be impacted by— including the sale of assets or any interest earned on investments.

So, essentially, operating income is a sub-factor that is tallied when calculating net income.

Too often, business owners focus on their net income, when this isn’t an accurate depiction of your operational profitability, since one-time sales or expenses are included in net income that aren’t a regular part of a company’s day-to-day earnings. A company’s net income may not be reflective of its true financial state. It’s often much wiser to calculate your operating income and make any financial decisions based on that amount.

What are the biggest differences between operating income VS net income?

The biggest difference between operating income and net income is that operating income only includes profits that are generated from the operations of a single business. This means that investment incomes, liquidated assets, or one-time losses are not factored in when calculating operating income.

Net income, on the other hand, does include these numbers, providing a final figure that represents all of the activities of a business entity within a given timeframe. It’s also important to note that if a single corporation has multiple businesses or brands under its umbrella, the total revenue earned from all of these enterprises would be taken into account when producing the corporation's net income.

Which figure matters most?

There is no “most important” figure when it comes to net operating income VS net income. Each is crucial to gaining a clear understanding of your business’ financial performance.

With that being said, there are certain circumstances where one can be more beneficial to calculate than the other.

For example:

Investors who are interested in financial backing a business will be more concerned about the venture’s operating income. This is because a company’s operating income does not include out-of-the-ordinary, one-time expenses like repairs for a flooded warehouse, or having to train a new employee.

These expenses are not reflective of the company’s typical operating costs and therefore are not relevant when considering its profitability as a whole.

On the flip side, there are situations where net income is more valuable.

For example:

When businesses produce their annual reports, it’s critical that they produce exhaustive, accurate documentation of their finances— without any gaps.

In this case, net income is essential. Let’s say you are a bakery, and your month-over-month operational income has been profitable, but during the second quarter of the year a major piece of equipment malfunctioned and you were forced to purchase a new unit. When this cost is included in your annual report, your net income may not be as high as you’d hoped. However, it is still important that you record this expense so investors, accountants, and others have a big-picture understanding of why your net income was impacted.

How I can help

As Certified Public Accountants with experience assisting businesses and corporations of all sizes, we are uniquely qualified to help you fine-tune your financial strategy and set your venture up for success.

Whether you are looking to compile a business valuation review, conduct a cash flow analysis, or implement a cost reduction program, we can provide the comprehensive and precise financial services you need to ensure every factor, figure, and cent is taken into account.

If you’re looking for Certified Public Accountants who takes an individualized and companionable approach to business financial consulting, contact us today. Your books have never looked so good. We reasonably assure it! [high fives elderly, bearded gentlemen in ill-fitted suit]

David Burton