How to Increase Operating Income: 10 Tips for Businesses
As a business owner, you’re always looking to know how to increase operating income and improve your bottom line. Whether it’s finding new customers or reducing expenses, every little bit helps. So what are some practical ways you can increase your operating income?
Here are some tips on how to increase operating income.
What Is Operating Income?
Operating income is a measure of the profit a business makes after subtracting the costs associated with running the business. These costs can include wages, depreciation, and the cost of goods sold.
Operating income is a company’s total revenue minus its operating expenses. Operating expenses include things like costs of goods sold (COGS), depreciation, and other expenses that are necessary to keep the business running. This calculation is useful because it removes one-time costs (like tax payments) that might otherwise distort your profits.
Operating income can be found on a company’s income statement, typically near the bottom of the document. This line item details the money a company has made from its core operations, as opposed to other sources such as investments or loans.
Why Operating Income Is Important:
Any business’s driving force is its operating income. A business cannot finance its day-to-day operations without consistent income.
Operating income is more valuable than total income in most cases. It provides valuable information about the profitability and productivity of a company’s primary operations. Companies with predictable customers and cash flows that are steady have higher cash flows than those with high non-operating income.
A large number of businesses fail because they lack cash. It is crucial that businesses have consistent operating incomes.
What is Non-Operating Income?
Non-operating income, which is different from operating income, is the income earned by an organization from activities that are not related to its core business operations. It can include dividends, income, interest, gains, and losses from investments, as also foreign exchange and asset writing-downs.
Operating Income vs. Non-Operating Income
Operating income is earned by a company selling its core products and services. Non-routine revenue, on the other hand, is generated from non-routine sources. An example is the one-time sale or lease of a fixed asset such as a building or equipment.
These transactions may also generate non-operating income.
- Customers are charged late fees
- Proceeds from lawsuits
- Royalties and licensing revenue.
These earnings are not part of a company’s total revenue. They come from the company’s daily operations. It cannot be used to assess the general health and well-being of the business.
Your business’ stability can be revealed by the ratio of operating revenue and non-operating revenue. A high proportion of non-operating revenue could indicate cash flow problems in the future or current.
Is Operating Income Same as Profits?
It’s not exactly. Operating income is the amount left after subtracting the cost of goods (COGS), and other operating costs, from the sales revenue. It does not include interest, financing charges, taxes, depreciation, and amortization.
How to Calculate Operating Income
The formula for calculating the operating expense ratio is outlined as follows:
operating income = Gross Income − operating expenses
Operating income does not include one-time items such as cash paid for a lawsuit settlement. To calculate a company’s operating margin, which describes its operating efficiency, you need operating income.
Operating Income Examples
When evaluating the operational success of a business, many companies look at operating income. Company ABC, a hospital- and drug company, reports that its operating income increased by 20% year-over-year to $25 million in the first two quarters. Due to an increase in patient volume, the company saw an increase in both revenue and operating income. Two of the company’s immunotherapy drugs, one for lung cancer and one for melanoma, drove the increase in inpatient visits.
Another example is Company Red, which reports financial results in the first quarter of its fiscal year. Compared to the same period last year, the company saw an increase in operating income of 37%. The company’s report on the increase in operating income is particularly important as it is planning to merge with Company Blue. Shareholders will vote next month. Although Company Red’s first-quarter sales fell by 3%, the company’s operating income growth could give Company Blue shareholders confidence to vote for merging the two companies.
How to Increase Operating Income
Adjust your approach to increase your operating income if your current levels are not where they should be. Businesses that generate this kind of revenue are more likely than others to be able to finance their operations without the need for outside financing. This is important because borrowing money can be costly and increase your risk.
There are main ways to increase operating income.
Increase number of customers:
Customers are the lifeblood of any business. Getting more customers is one of the best ways to increase your operating revenue. This will also increase your sales revenue.
These strategies can help you attract more people to your business.
- Start social media campaigns
- Create an email list
- Advertise in your local newspaper
Increase the average transaction size:
You can upsell if you have a loyal customer base. If you’re a retailer, consider offering promotions such as buy-one-get-one-half-off. You can also bundle services if your business is a service provider to make the total cost more attractive to customers.
Increase frequency per customer transactions:
Offering your customers a loyalty program is one of the best ways to increase repeat business. A loyalty program is a great way to increase customer satisfaction.
Reduced cost of goods
To reduce the cost of goods sold, work with your suppliers and parts suppliers. You can cut your costs by negotiating a lower price, a volume discount, or other cost-savings deals. Packaging is a major expense, even though it is often overlooked. To save additional costs per item, consider a new product packaging design. If you maintain your current pricing, your profit margin will increase.
Reduce Labor Costs
The salary and taxes you have to pay to employees is another cost that eats into your profits.
By finding ways to cut back on your labor expenses, you can increase your company’s net income. This can be a good way to improve your overall business performance.
- Call your utility companies and ask about ways you can reduce energy consumption.
- Hire a professional to conduct an audit on your building and find ways to be more energy-efficient.
- Install a solar panel or another renewable energy source to offset your energy use.
You can save money on your monthly energy expenses by opting for cost-effective improvements to your home’s energy efficiency. Most utility services offer free energy consumption analyses, so it’s worth taking advantage of this service to see where you could save. Even if the improvements you make don’t require a large cash investment, the money you save in monthly energy expenses will increase your operating income.
Reduce Operating Costs
Evaluating your business’ operating expenses is a great way to reduce spending and save money. There are many areas where you can cut costs, from insurance premiums to overhead and supplies. By taking a close look at your expenses, you can find ways to save money and keep your business running smoothly.
When it comes to operating costs, it’s important to choose less expensive options whenever possible. This can help reduce spending and increase income for your company. By eliminating unnecessary expenses, you can free up more money to reinvest in other areas of your business.
There are a few key ways to reduce operating expenses:
- Analyze your current expenses and identify areas where you can cut back
- Streamline your processes to make them more efficient
- Outsource or automate tasks where possible
- Reduce your overhead costs
- Review your pricing strategy and make sure you’re not leaving money on the table
If you don’t keep track of your finances, it can lead to some pretty dire consequences. Poor bookkeeping can result in late fees, penalties, and interest charges. It can also make it difficult to get a loan or line of credit.
It can seem daunting to manage your company’s finances as a business owner. However, managing your company’s finances is an essential part of running a business that will last.
Start tracking important financial metrics, such as operating income, if you don’t have it already. It is better to identify and fix problems early than later. These tips on how to increase operating income will help you grow your business.