Operating income is a company’s profit from its core business operations, calculated from Gross Profit less selling, general, and administrative expenses.
Primary Implication
The most efficient and effective way to increase Operating Income is to generate a higher Gross Profit. Earning a higher Operating Income by reducing overhead costs will increase your operating profits and is always a smart move when you have overhead expenses that aren’t contributing to higher sales and more efficient operations. For most established businesses, this is the first area to attack for making more money, given how easy it is to add low to no contributing fixed costs to a business.
Overview
Operating Income is the second level of business profit. It’s the second most important number from your P&L Statement, which measures what it costs you to support your operations out of every dollar of Gross Profit earned.
Operating Income or EBITDA earnings are calculated from the company’s Gross Profit, less SG&A, or overhead expenses. EBITDA is a financial term that stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
The profit view reflected in operating earnings is used to determine how profitable a company is concerning operations, and it’s a more accurate picture of a company’s success than Gross Sales, Gross Profit, or Net Income. This profit number represents the income or profit resulting from your primary business operations.
The most efficient and effective way to increase Operating Income is to generate a higher Gross Profit. Earning a higher Operating Income by reducing overhead costs will increase your operating profits and is always a smart move when you have overhead expenses that aren’t contributing to higher sales and more efficient operations. For most established businesses, this is the first area to attack for making more money, given how easy it is to add low to no contributing fixed costs to a business.
If you are dissatisfied with the amount of Operating Income being generated, the first question is the biggest drain against your operating profits a problem of not producing enough Gross Profit to fund your overhead, or are your SG&A expenses too high?
If Gross Profit is too low the next question is a sales or cost management problem. If it’s a sales problem, click here to learn about the three fundamental customer growth strategies. If direct costs are too high, then you are looking at the same process as if your overhead is too high. Click here to learn how to stop your profit losses through BusinessCPR™ Management System Step 4—Stop the Losses That Keep Your Business at Risk.
The next consideration is who is the best person to be accountable for fixing the problem area you have identified above.
