What’s Better for You: Net Income vs. Operating Income
For businesses small and large, the importance and impact of proper accounting processes cannot be overstated. If you have an excellent service or a product that’s flying off the shelves, failing to track the money coming in and out can completely undercut any success you may be enjoying. Accounting practices allow you to gauge the health of your business, track important trends, and adequately plan.
Among the figures that business owners will most frequently have at the forefront of their minds is income. But not all ways to measure income are the same. That’s why it’s vital business owners understand how to measure income, specifically net income vs. operating income.
Defining Net Income vs. Operating Income
At the surface level, income represents the amount of revenue you’re bringing in after taking away business costs. But how you count those business costs and what’s included is a key question towards understanding net income vs. operating income.
Operating income measures your business’s profit, taken as revenue minus fixed operating expenses (such as wages, rent, etc.) and variable expenses (such as the depreciation of assets). It can be looked at as the running tally of profit your company makes each month after accounting for the regular monthly costs you expect to incur.
While this sounds straightforward, net income takes those calculations and adds more long-term accuracy to it. Net income factors in the non-operating expenses of running a business which are either one-time costs or non-recurring expenses. Any large piece of equipment that you purchase as an investment that is meant to last over the years is not considered an operating expense because it’s not a regular occurrence on your balance sheets. Thus, it’s not a part of the operating income. But because net income is meant to give a fuller and broader view of the money being made by the business, this measure does include such significant non-operating expenses. As a result, net income is a more accurate view of income over time.
What Are the Benefits of Each?
The reason accountants and business managers discuss net income and operating income is because they are essential in specific scenarios.
Operating income is a valuable metric to keep track of how your business is performing monthly. If you take on a significant one-time expense in a given month, it will make your income for that entire quarter look troubling. But that expense isn’t going to happen in subsequent quarters, so that decreased net income isn’t a sign of trouble ahead for the business and, as such, operating income is the more important number to keep in mind.
If you want to give a long-term vision of how your business is making money, net income may be a more accurate measure to use. Similarly, net income will be more representative of the taxes you’ll have to pay since non-operating expenses are still business expenses that can reduce your taxable obligations.
Tobin & Collins is New Jersey’s CPA & Financial Advisors
Understanding when to use net income vs. operating income is essential as you grow your business. If you don’t know how to get started with your income tracking, Tobin and Collins can help. Our expert accountants and tax consultants are ready and able to assist you, so get in touch with us to get started today.