Operating income is the profit a company makes from its primary business activities. Net income is the bottom-line income, or final profit, achieved after all revenue and expense-related activities are evaluated during a given period.
Operating Income Basics
To calculate operating income, you subtract operating expenses, such as costs of goods sold and selling, general and administrative expenses, from revenue in a given period. If revenue equals $150,000 and operating expenses equal $100,000, your operating income is $50,000. Operating income is viewed as a critical sign of financial health in a business. It also signals to shareholders, creditors and company leaders what income the company is likely to maintain through regular business activities.
Net Income Basics
Net income is operating income plus any irregular revenue, and minus any irregular expenses. Investment or asset sales are examples of irregular revenue. Legal fees are a common irregular expense. While these expenses lower net income, they don't impact ongoing business activities. Therefore, net income is a company's true income for a specific period, but operating income often is more significant for future projections.
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