How to Figure Out Net Operating Income
Net operating income is the income earned by a company after operating expenses are deducted from operating revenue. Net operating income does not necessarily equal net income. Other types of income and expense are calculated and combined with the net operating income figure to determine a company's total net income. To determine net operating income, you must separate your operating activities from other business activity. If you're using the information to compile financial statements, transfer your net operating figures to the income statement after you perform the calculations.
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Instructions
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Calculate the total operating revenue for the company. This includes all revenue earned from selling products and services. Do not include non-operating revenue that comes from investments, interest or other financial activities.
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Calculate the cost of selling the products. This includes costs directly associated with the production of goods, such as direct materials and direct labor. Do not include costs that are not directly associated with production, such as rent and utilities.
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Subtract the sales cost from sales revenue. The result is the gross margin. The margin is the amount of revenue available to pay business expenses other than sales costs.
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Calculate depreciation and amortization of all your business assets. Use IRS depreciation tables to calculate depreciation as found in the IRS Instructions for Form 4562.
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Calculate your remaining operating expenses. Additional operating expenses that should be included in this calculation are administrative expenses, general expenses and selling expenses. Examples of these expenses include administrative salaries, rent, utilities, salesperson salaries, advertising expenses and office expenses.
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Subtract depreciation and remaining operating expenses from the gross margin. The result is the net operating income.
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