Operating Income, Net Income and Net Operating Income: Definitions
By Indeed Editorial Team
Updated November 1, 2021 | Published June 12, 2020
Updated November 1, 2021
Published June 12, 2020
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Net operating income measures the profitability of an income-producing property and is a term most often used in the real estate industry.
Operating income measures a company's income after accounting for operating expenses only.
Net income measures a company’s total income remaining after accounting for all business expenses.
Companies use different calculations to determine their business' success, but some common metrics are net operating income, operating income and net income. While all of these calculations provide information about the company's earnings, they include and exclude different figures to assess the company's financial and operational health.
In this article, we define net operating income, operating income and net income, describe the differences between them and outline the documents and information needed to calculate these metrics.
What is net operating income (NOI)?
Net operating income is the profitability of an income-producing property. This term is most frequently used in the real estate industry, but it applies to any company or business that earns income from a property. To determine net operating income, calculate all the revenue from the property and subtract any related operational expenses. Property revenue includes items like:
Operating expenses associated with properties often include items like:
Payroll for any staff
Capital expenses, like purchasing new appliances or updating the heating system, are not included in the net operating income calculation. You can calculate net operating income over any set time frame, but it's most frequently done annually.
Here are the basic steps you can use to calculate NOI:
Add all gross income.
Calculate all operating expenses.
Calculate net operating income.
Total gross income - Operating expenses = Net operating income
Businesses outside of the real estate industry often refer to net operating income as EBIT, or earnings before interest and taxes. EBIT includes the same types of revenue and expenses in its calculation as net operating income without the property specificity.
Related: What Is Net Operating Income?
What is operating income?
Operating income is an expression of a company's income after accounting for operating expenses only. It's also known as operating profit. Operating income helps businesses see how successful their operations are without considering additional income from unrelated revenue sources or expenses like taxes or interest on loans. Usually, operating expenses include items like:
Benefits like health insurance
Marketing and sales materials
You can calculate operating income in one of two ways:
Revenue minus operating expenses
Revenue is the total sales minus any returns from products sold. To calculate operating income using this formula, look at the total revenue on your income statement (usually the top line) and subtract all operating expenses from that number.
Total revenue - Operating expenses = Operating income
Gross profit minus operating expenses
Gross profit is total revenue minus the cost of goods sold. Total revenue includes all income from the business and not just in the income generated from sales. The cost of goods sold is any expenses directly tied to the production of the product. To calculate operating income using this formula, take gross profit and subtract operating expenses from that figure.
Gross profit - Operating expenses = Operating income
Many businesses calculate and compare their operating income annually using a yearly income statement. Others choose to calculate operating income more frequently, such as from quarter to quarter or month to month. You can calculate operating income over any time frame so long as you have the appropriate data.
Related: How To Calculate Operating Income
What is net income?
Net income is the total income remaining after accounting for all business expenses. It's also known as the bottom line since net income is usually the last line item on a company's income statement. This means in addition to accounting for operational expenses, net income accounts for all other expenses to determine how much pure profit the company has earned.
Operating income - Non-operating expenses = Net income
To calculate net income, subtract all non-operating expenses from operating income. This means you must first calculate operating income before determining net income. Non-operating expenses might include items like:
The final net income figure represents the company's total earnings or profits. Like operating income, you can calculate net income over any period of time, such as a month, quarter or year.
What are the differences between operating income and net income?
While operating income and net income both provide earnings figures, the formulas evaluate unique aspects of the business.
Operating income shows you how successful a business is at operating and producing. Some businesses might have a substantial number of loans with high-interest payments that negatively impact their bottom line. Despite this, the operations of the company might be highly successful. Operating income helps you and your stakeholders see how effective the core of the company is without deciphering other income or expenses.
Net income, in contrast, shows your company's total earnings after accounting for every single business expense. This figure helps you and your stakeholders see if the business is profitable after paying every bill, fee and tax. Unlike operating income, it does not give any indication of the company's operational performance but instead offers a simple earnings evaluation.
Resources for calculating operating income, net income and net operating income
Calculating the types of business income can require a variety of resources and documents. When you're ready to determine your operating income, net income or net operating income, gather this information to help you:
Property management documents
Your company's income statement is a valuable tool for calculating all three income metrics. An income statement is a document that records a business' profits and losses over a period of time. All the figures you need to calculate operating income and net income should appear on your income statement including revenue, itemized operating expenses, non-operating expenses, interest payments and taxes.
Depending on the structure of your income statement, you may need to consult your tax returns or other tax documents to find the figures for some net income and net operating income calculations. For example, you might want to know how much you paid in property taxes exclusively rather than all other taxes when considering your total operating expenses.
Similarly, your income statement might not itemize your interest payments in a way that supports quickly calculating your income metrics. Identifying how much you pay in principle versus interest and on which loans might affect your income calculations.
Property management documents
The operating expenses category of a net operating income calculation can vary from business to business depending on the type of property and the included amenities. It's helpful to review contracts and management documents to ensure you have accounted for all expenses and revenue streams.
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