Operating income: our guide to everything you need to know

Calculating operating income: what is it?

Operating income accounts for all current operations over a financial year.

A definition of operating income

Operating income is a performance indicator for your company. It corresponds to the sum of operating revenues minus operating expenses.

Operating income provides an assessment of your business model. This indicator assesses your company's ability to generate income based on production or economic assets held. In contrast to operating income,EBITDA is an indicator for measuring the factors driving improvement in operating income.

How do you calculate operating income?

The simplest way to calculate operating income is to look at the income statement. Operating expenses are subtracted from total revenues. The formula is as follows

• Operating income = operating income - operating expenses

How to interpret operating income?

The calculation of operating income can be interpreted in two ways:

• Revenues exceed expenses: the company is profitable.
• Expenses exceed revenues: the company is making a loss.

If the operating income statement is close to zero, this may be due to high raw material costs, high payroll costs, an over-competitive market, etc.

How do you go from operating income to EBITDA?

EBITDA stands forgross operating surplus. It is calculated before operating income. EBITDA is calculated according to the following formula:

EBITDA = Sales - (Purchases + Third-party consumption + Personnel costs + Operating subsidies + Taxes).

With EBITDA, it is possible to calculate operating income by adding back operating expense write-backs, transfers of operating expenses and so on. EBITDA includes the subtraction of depreciation, amortization and provisions, as well as the withdrawal of management expenses.

What products are included in the calculation of operating income?

Operating income is made up of several products. SeDomicilier explains these elements in detail, point by point.

Sales figures

Sales include merchandise, goods and services. This indicator is shown exclusive of tax (HT) and not inclusive of all taxes (TTC). The amount received by the company is inclusive of all taxes. It includes VAT to be collected and paid to the Treasury. Consequently, it is not relevant to include VAT in the calculation of operating income.

Operating subsidies

An operating subsidy is a solution for financing a company's operating expenses. Are you wondering what operating expenses are? They may include energy, telephone and Internet costs, personal expenses, purchases of raw materials, etc.

An operating grant can be used to finance the purchase of equipment to boost business performance, such as IT equipment and production machinery.

Obtaining an operating subsidy is an interesting way of financing a shortfall in operating income. It is added directly to the company's income for the year in question.

Acquisition of raw materials or merchandise

Thepurchase of raw materials and merchandise impacts a company's operating income. Purchasing costs reduce your sales margin. This is a particularly sensitive criterion for trading companies.

Stored production

Inventoried production represents the change in inventories and work-in-progress of goods/services between the beginning and end of a fiscal year. Production is valued on the basis of product production costs.

Transfers of operating expenses

Expense transfers may include state aid for employment contracts: contrat unique d'insertion, apprenticeship support, etc. It is possible to benefit from a charge transfer to compensate for the cost of repair work following a disaster.

Other operating expenses

The operating income statement includes other expenses. Here is a summary table:

A summary of operating income and expenses

SeDomicilier provides a summary of operating expenses and income:

Are you wondering about the differences between income and expenses? We can give you a clear answer:

• Revenue corresponds to your company's income.
• Expenses correspond to your company's losses.

Operating income is obtained by subtracting your total operating expenses from your total operating income.

Why measure your company's performance?

Measuring your company's performance is no trivial matter. It's essential to developing your growth strategy.

Why measure your company's performance?

This approach requires you to produce quantified results in the form of quantitative and sometimes qualitative financial ratios. Measuring performance gives you a better grasp of your results. It enables you to interpret your growth and improvement drivers.

What other barometers should be taken into account?

The following barometers can be used to measure the health of a company:

Operating income is a key performance indicator that gauges your company's financial health. A detailed analysis of operating income enables you to identify the levers you need to develop to optimize your business revenues.