What is operating income?

Definition

Operating income is the profit left from the shop's main work after product cost and the costs of staying open, and before interest and taxes. On the books, this is an Income Statement subtotal, not a cash balance and not an account you debit.

A garden center reads it as what remains after plants and soil that sold, and after rent, wages, and the other keep-the-yard-open costs. Interest on a loan and income tax sit below this line.

It is not a ledger account with a running balance. It is the leftover the statement computes each period, then starts again next period.

Accrual books use earned sales and incurred costs, even if cash has not moved. A cash-basis reading can shift the same leftover into a different month.

Where it shows up

P&L: Located below operating expenses, before interest and taxes.

Balance Sheet: Related to the working capital that produced this period's operations.

See also: Gross Profit · Operating Expenses · Operating Margin

When you look at your Income Statement, this subtotal sits under the operating expenses block. Revenue and product cost sit above it; interest and tax sit further down.

When the figure is high, the yard kept more of each sales dollar after running costs. When it is low, product cost rose, overhead rose, or sales were light.

The Balance Sheet does not print this subtotal. The inventory, unpaid bills, and cash that supported this month's sales sit there instead.

Gross profit is the leftover after the plants that sold. This subtotal is that leftover minus the keep-the-yard-open costs.

On the Statement of Cash Flows, this subtotal is not its own line. Cash from operations starts from a lower profit figure and then adjusts for items that were not cash.

A split by greenhouse, nursery, or shop can show the same leftover in pieces. The whole-yard figure is still core work before interest and tax.

How it works

The statement starts with sales. It subtracts the plants and soil that sold, which leaves gross profit.

It then subtracts the period's operating expenses. Rent, yard wages, utilities, and similar keep-the-doors-open costs come out here.

What remains is this subtotal. Interest and taxes have not been subtracted yet.

Stay with the leftover from core work when you read the line. A gain on selling an old truck, or interest earned on a savings account, sits below this subtotal.

Do not treat a strong cash week as this figure. Cash can rise from collecting last month's invoices while this leftover is small.

Cost of goods sold is the plants that left with customers. That subtraction happens above this subtotal, not inside it.

Selling, general, and administrative expenses are often the block subtracted to arrive here. The subtotal's meaning does not change.

After the month closes, this leftover is part of the period's profit story. Next month starts the count again from zero.

Example

Willow Gate Garden posts $80,000 of plant and pot sales this month. The plants that sold cost $48,000, so gross profit is $32,000.

Yard rent, wages, and utilities add up to $22,000 of operating expenses. Subtract those, and operating income is $10,000.

The $10,000 is the leftover from running the yard, before a $400 interest charge and before tax. It is not cash sitting in the till.

If the same month had $2,000 more in wages, this leftover would be $8,000. Sales and product cost would not have to change for the subtotal to move.

A Saturday rush that lifts sales without adding much overhead will raise this leftover. A week of overtime in the greenhouse will lower it.

Last June the yard posted $70,000 of sales and $9,000 of this leftover. This June's $10,000 is higher in dollars; the rate against sales is a separate reading.

Common mix-ups

Operating income is not the same as gross profit. Gross profit is leftover after product cost only; this subtotal also subtracts the costs of staying open.

Operating income is not the same as net income. Net income is what remains after interest, taxes, and other items below this line.

Operating income is not the same as cash. A month can show a healthy leftover while the bank account is waiting on collections.

Related terms

• Gross Profit: Revenue minus the direct cost of delivering it.
• Operating Expenses: The ongoing costs of running the business that are not direct costs of sale.
• Operating Margin: Operating income as a percentage of revenue.
• Income Statement: A statement showing revenue earned and expenses incurred over a period, ending in net income.
• EBITDA: Earnings before interest, taxes, depreciation, and amortization.
• Net Income: What is left from revenue after every expense, including interest and taxes, is subtracted.
• Other Income And Expense: Non-operating items reported below the operating income line.
• Departmental P&L: An income statement split by department, location, or product line.