You may be confused when you hear someone ask “are operating income and net income the same?” In most cases, they are not. If your net income and operating income are the same when you run your Profit & Loss, you may have a misclassification of some accounts.
Operating income is the income you generate through your operations. This is your revenue from sales of products and services performed in your daily business operations less the expenses it takes to produce and sell them. Operating income does not take into consideration: income from investments, expenses from financing or taxes, or one-time extraordinary expenses or income items, such as the gain on the sale of an asset.
Operating Income Formula:
Operating Income = Gross Income – Operating Expenses – Depreciation & Amortization
Net income is the final bottom-line income for your business. If your operating income is $125,000 and you paid $10,000 interest on your loan, $12,000 in taxes, and you had $1,000 in dividend income, your Net Income would be $104,000 ($125,000 +$1 ,000 – $10,000 – $12,000).
Net Income Formula:
Net Income = Operating Income + Investment Income – Interest Expense +One-time Extraordinary Income – One-time Extraordinary Expenses – Taxes
Why are they different?
The reason for the distinction? Operating income represents how the revenue and expenses flow in and out from business operations alone, regardless of whether your business operates on debt or has extra cash reserves. If your operating income is healthy, your business value will likely be healthy regardless of your net income.