If you own or operate a business, there are a ton of financial factors to consider. How much your company is making is more complicated than adding up the sum of your sales figures. A big part of your business’s bottom line and understanding performance lies in the difference between your revenue and operating income – two figures you’ll see represented on your company’s income statement.
What is Revenue?
Revenue is the total amount of income that your business generates from the sale of its goods or services. This is your raw sales figure before deducting any expenses. So, if you sold 100,000 items at $10 each last year, your revenue would be $1 million.
You’ll often see this figure at the top of your company’s income statement, and you might also hear this referred to as “net sales” even though that term isn’t always accurate. Revenue counts only your business-related income, so if your business earns income from other sources like investments, you’ll account for this separately.
What is Operating Income?
Your company’s operating income is its profit after it takes into account operating expenses or the cost of running the business. The formula for figuring out operating income is:
Operating Income = Gross Income – Operating Expenses
The amount left after you subtract what it costs to produce your products or services is your company’s gross income. In other words, Gross Income = Revenue – Cost of Goods Sold (COGS).
Your business’s operating expenses are the rest of the expenses connected with the operation of your business. These might include employee wages, rent & utilities, insurance, office supplies, and technology. You can add these together to come up with your operating expenses.
Revenue vs. Operating Income Example
Acme Manufacturing makes a single type of scanner that sells for $10,000. The company wants to qualify for financing to expand its operations and needs to be able to demonstrate its operating income to potential creditors.
Last year, Acme sold 200 scanners, so the company’s revenue was $2 million.
Other expenses for the year included:
- Cost of goods sold: $400,000
- Employee wages: $380,000
- Rent, utilities, and upkeep: $200,000
- Insurance: $20,000
- Office supplies & technology: $5,000
Before you calculate operating income, you’ll need to figure out your gross income.
Revenue – COGS = Gross Income
$2,000,0000 – $400,000 = $1,600,000
Next, you’ll want to total up your operating expenses, which is everything on the list except the COGS.
$380,000 + $200,000 + $20,000 + $5,000 = $605,000
Now that you have these figures, you can calculate your operating income.
Gross Income – Operating Expenses = Operating Income
$1,600,000 – $605,000 = $995,000
Acme can show creditors that it has revenue of $2 million and operating income of $995,000 over the past year.
Get an Accurate Picture of Your Business Performance
Separating revenue and operating income is vital because it gives a clearer view of how your company makes money. Creditors and investors often use this figure because it doesn’t regard tax rates or interest expenses, which can vary from one company to another.
The accuracy of your financial reports drives not only your strategic business decisions but also your business’s tax filings. Getting the right information is vital to the survival and growth of your business.
At Nolan Accounting, we offer tax planning and preparation services to business clients throughout Southeast Wisconsin. Contact us today to learn more about our services or with any questions.