Operating income refers to a company’s profit generated from its core business operations, excluding taxes and interest. It reflects how efficiently a business is able to manage its resources and operations to generate earnings before non-operating expenses are considered.
In Singapore, many companies struggle with rising overhead costs and inefficient expense management, which can impact their operating income. A clear understanding of this metric is crucial—it helps businesses assess financial health, optimize budgeting, and improve operational performance.
Businesses that actively monitor their operating income and implement cost-control strategies are more likely to experience sustainable growth and stronger financial stability.
This article will walk you through the fundamentals of operating income, its importance in business decision-making, and strategies to increase profitability within the Singaporean market.
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Key Takeaways
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What is Operating Income?
Operating income, referred to as operating profit, indicates how much a company earns from its regular business activities after accounting for operating costs like salaries, depreciation, and production expenses.
It is determined by subtracting all operational costs from gross profit, which itself is derived from total revenue minus the cost of goods sold (COGS). These operational costs typically stem from everyday business functions and include things like utility bills and office supplies.
This metric shows the profit after covering all core operating expenses. These costs are classified as direct (materials, labour) or indirect (admin wages, rent, marketing, sales commissions).
Operating Income Formula and Calculations
There are three primary methods to calculate operating income: the top-down method, the bottom-up method, and the cost accounting categories method.
1. Top-down method
This approach determines operating income by applying the following formula:
- Gross profit represents the earnings remaining after deducting the cost of goods sold (COGS) from total revenue.
- Operating expenses include essential costs such as selling, general, and administrative expenses needed to run the business, but exclude interest and tax payments.
- Since operating costs don’t account for allocated expenses, deductions for depreciation and amortization must also be made.
2. Bottom-up method
Rather than beginning with revenue, operating income can also be determined by using net income. Since net income is derived by deducting certain items from operating income, you can add those items back to net income to calculate operating income.
To use this formula, a complete income statement is necessary, as net income is the final figure in the financial report. In such cases, the company may already include operating income near the bottom of the statement.
3. Cost accounting categories method
While financial accounting doesn’t typically emphasize direct and indirect cost categories, some companies use these classifications internally. In such cases, operating income can be determined by subtracting both types of costs from net revenue, since items like taxes and interest are generally not included in either category.
This formula uses net revenue to account for any product returns or other necessary deductions from total (gross) revenue.
Components of Operating Income
Operating income is determined using net sales and two primary categories of expenses associated with operations: direct expenses (COGS) and indirect expenses.
COGS are costs directly involved in producing the company’s goods or services. Examples include:
- Raw materials and components needed to produce goods or services
- Pay for workers directly involved in production or service delivery
- Depreciation of machinery used in the manufacturing process
- Utility bills for production sites
When these expenses are deducted from net sales, the result is gross profit, also known as gross income.
To calculate operating income, indirect operational expenses are then subtracted from gross profit. These are expenditures required to support business operations that don’t pertain directly to production.
Often categorized under selling, general, and administrative expenses, examples include:
- Costs of office equipment and supplies
- Wages for administrative and managerial staff
- Expenses related to advertising and promotions
- Depreciation of administrative assets
- Selling-related expenses like travel
By integrating reliable accounting tools and internal controls, companies can enhance financial transparency, calculate operating income efficiently, and optimize the corporate accounting process. A well-structured accounting system supports overall business efficiency, helping organizations maintain stability and long-term growth.
HashMicro’s enterprise accounting software integrates with the ERP system, streamlines financial processes, enhances data accuracy, and ensures compliance with industry regulations. Check out the pricing banner below to find the best solution for your corporate accounting!
Operating Income vs. Net Income
Understanding the difference between operating income and net income is essential in financial analysis. Operating income represents the profit a company earns from its core business activities, after deducting the cost of goods sold (COGS) and operating expenses such as staff salaries, utilities, and rent.
Net income is the final profit after all expenses and revenues, including non-operational ones, are accounted for. It typically appears lower than operating income, which only includes core business costs. In financial statements, operating income is listed in the middle, while net income appears at the bottom as the “bottom line.”
Operating Income vs. EBIT and EBITDA
Operating income, often called operating profit or recurring profit, closely resembles EBIT (Earnings Before Interest and Taxes) since both reflect a company’s profitability from core operations, excluding interest and tax expenses.
Although EBIT can occasionally account for additional operational costs beyond interest and taxes, the figures for EBIT and operating income are similar for most businesses. However, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) diverges more significantly.
Unlike operating income, EBITDA does not subtract depreciation and amortization, offering a broader view of a company’s cash-based performance by excluding non-cash expenses. It makes EBITDA useful for evaluating operational efficiency without the impact of asset-related costs.
Enhance Your Operating Income through HashMicro’s Accounting Software
HashMicro’s Accounting Software efficiently optimizes business financial management, particularly focusing on operating income. Integrated with ERP systems, the software simplifies corporate accounting by automating tasks such as invoicing, tax calculations, financial reporting, and tracking of expenses.
Furthermore, HashMicro provides businesses with the flexibility to tailor their accounting systems to their specific operational needs. With fully customizable features, companies can implement a solution that aligns perfectly with their financial workflows, ensuring seamless integration into their existing processes.
For those interested, HashMicro offers a free demo to explore its capabilities. This demo showcases tools designed to automate financial workflows, enhance expense tracking, and provide clearer insights into operating income for better decision-making.
Here are the key features of HashMicro’s Accounting Software, focused on optimizing operating income:
- Bank integrations—auto reconciliation: Automatic reconciliation of transactions with the bank, reducing the risk of errors in operating income reporting.
- Multi-level analytics: Gain insights into operating income across multiple projects, comparing financial reports to make informed, data-driven decisions.
- Customizable financial and invoice reporting: Generate detailed financial statements with budget comparisons and create invoices tailored to business needs.
- Financial statement with budget comparison: Helps compare operating income with budgeted projections to maintain accuracy.
- Comprehensive budget and forecasting tools: Display profit and loss comparisons, cash flow reports, and S-curve analysis for better planning of operating income.
- Cash flow reports: Automatically monitor and report incoming and outgoing cash, aiding in the efficient management of operating income.
In addition, HashMicro introduces Hashy, an AI-powered system designed to optimize financial processes, focusing on improving operating income management. Hashy AI streamlines transaction tracking, data analysis, and risk management to enhance operating income efficiency.
A standout feature, the AR Collector, automates invoice follow-ups and SoA, ensuring steady cash flow and stable operating income. On the other hand, the AP Payables feature simplifies payment processing, enhances vendor communication, and provides timely payments, which is crucial for accurate operating income calculations.
Conclusion
Implementing HashMicro’s Accounting Software in Singapore can optimize business profitability through automation, centralized income tracking, and advanced features like real-time financial reporting and cost management, ensuring smooth income operations.
It plays a pivotal role in enhancing operating income, with the software offering predictive insights, more innovative income planning, and automated risk management. These innovations improve accuracy, streamline processes, and simplify financial decision-making.
With HashMicro’s Accounting Software, businesses in Singapore can effectively boost profitability and foster growth. Stay ahead in operating income management with HashMicro for improved financial efficiency. Get a free demo today!
Frequently Asked Questions
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What is known as operating income?
Operating income refers to the adjusted revenue of a company after all operations and depreciation expenses are subtracted. Expenses of operation, or operating expenses, are simply the costs incurred in order to keep the business running.
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Which is not considered an operating income?
Non-operating income is the portion of an organization’s income that is derived from activities not related to its core business operations. It can include dividend income, profits or losses from investments, as well as gains or losses incurred by foreign exchange and asset write-downs.
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Is operating income the same as EBIT?
EBIT includes non-operating expenses, whereas operating incomes do not. EBIT refers to net income before deducting interest and income taxes, whereas operating income refers to an organization’s gross income minus its operating and business-related expenses.
