How to Calculate Net Operating Income
Net operating income (NOI) is the income you derive from your business after you have deducted your operating costs. In effect, it is your income before taxes and interest have been deducted. NOI is regarded as a good indication of how well a company is doing, as it is not easily manipulated by management. In simple terms, it is calculated by subtracting your operating expenses from your gross profit. Let's use an example of someone who operates a neighborhood store.
Other People Are Reading
Instructions
-
-
1
Compute your gross sales. This is the total receipts from all goods sold. Let's agree that this amounted to $50,000. This is your gross income.
-
2
Subtract the purchase price of the goods. If you bought the goods for $20,000, then $50,000 - $20,000 = $30,000 = gross profit.
-
-
3
Subtract your operating expenses to compute your NOI. If you paid salaries in the amount of $4000, had other costs such as utilities totaling $1000, and your rent was $2000, your operating expenses are:
$4000 + $1000 + $2000 = $7000
Your NOI is calculated by subtracting this amount from your gross profit:
NOI = $30,000 - $7000 = $23,000
-
4
Don't forget often overlooked expenses such as insurance and other administrative costs, as these all add up to your operating expenses. The above step is overly simplified. Every dollar spent in ensuring that your business runs smoothly is an operating expense.
-
1
Tips & Warnings
This is a simplified example but can be applied to any business or even investments. Your net operating income gives a clear picture of how you are doing financially and is a good ongoing measure of progress.
