How to Increase Operating Income

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Operating income is often considered the most appropriate measure of management's ability to use an organization's operating assets. It provides a better assessment of the organization's profitability trend than net income. Managers can increase operating income by isolating each income statement component that feeds into operating income: sales revenue, cost of goods sold or cost of services and operating expenses, which are selling and administrative expenses. An increase in operating income is a net effect. While a manager could increase sales and decrease product costs, for example, operating income is unchanged if executive salaries increase in proportion.

Things You'll Need

  • Historical revenue and expenses data

Revenue

  • Examine local and Internet-based competition to compare like and similar sales prices. Determine whether or not a sales price increase is possible without pricing a product or service out of the market.

  • Run promotions on high-margin items. Higher margin items produce more profit than lower margin items. So even though an item is discounted, increasing its quantity sold produces more profit per unit.

  • Compare the competition with regard to discounts. Companies run discounts on a variety of items at different times of the year. Eliminating or reducing discounts during periods when the competition does not discount may provide short-term gains.

Product Costs

  • Consolidate production supervisor responsibilities. For example, going from five to three supervisors reduces salaries and benefits and allows for an increase in salaries across remaining supervisors. Review all depreciable assets to ensure the depreciation method, depreciable life and salvage value are accurate. Changes can be made to all current and new assets or only to new assets.

  • Minimize overtime paid to production staff. Normally, overtime is required when demand of a product is higher than usual. Sometimes, however, overtime is the result of generous vacation and sick leave policies or production scheduling.

  • Negotiate with vendors to obtain discounts on raw materials. Many vendors will lower the cost in exchange for an increase in purchase volume. Shop for better deals with competing vendors, or join a co-op that acts as a purchasing agent for co-op members.

Period Costs

  • Analyze current advertising campaigns to determine their effectiveness. In the age of smart-phone applications and online social media, it is very possible to reduce advertising costs while maintaining a strong advertising presence.

  • Eliminate unnecessary overtime by administrative personnel. Restructure administrative functions, and eliminate positions that do not add value. Consider outsourcing functions such as payroll processing, human resources and accounting.

  • Renegotiate current rental costs, or consider relocating. This is likely not an option for retail businesses. Relocating could produce savings, however, for businesses that operate satellite administrative offices or for functions that are not affected by location.

  • Modify insurance plans for employees, inventory and fixed assets. If health-care costs increase, passing some of those costs to employees is an option. Evaluate insurance plans for inventory to ensure coverage is not excessive. Review insurance coverage for fixed assets to ensure against excessive coverage.

  • Conduct an energy audit. An energy audit helps managers review processes and identify areas to save money and to increase performance. Adjust corporate cellphone plans. The mobile market has become increasingly competitive, and most carriers provide corporate discounts.

Tips & Warnings

  • Increasing operating income may increase income taxes. Consult a qualified tax attorney and/or certified public accountant prior to implementation.

References

  • "Financial Accounting: The Impact on Decision Makers"; Gary A. Porter, et al.; 2009
  • "Accounting: What the Numbers Mean"; David H. Marshall, et al.; 2008
  • Photo Credit Phil Ashley/Lifesize/Getty Images
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