Gross Profit vs. NOI
In each time period that passes, businesses produce their revenues but also incur expenses acquiring products and running the operations needed to turn those products into actual revenue. Gross profit is equal to revenues minus expenses incurred in acquiring products intended for sale that were sold in the period in question. In contrast and comparison, net operating income is equal to gross profit minus expenses incurred through running operations.
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Revenues and Expenses
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Revenues are the sums that businesses earn through selling their products to their customers in the course of running their main operations. In contrast, expenses are the sums that businesses spend in order to acquire those products and then to turn them into actual revenue. Increases and decreases in the business’s financial holdings unrelated to their main operations are not categorized as revenues and expenses.
Gross Profit
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Gross profit is the portion of a business’s sales revenue that remains once the costs of acquiring the sold products are deducted. Sales revenue is calculated as being the number of sold products multiplied by the price at which they were sold. Expenses incurred in acquiring sold product are called cost of sales, cost of services or something similar depending on the nature of the business and can include disparate expenses such as purchase costs, direct labor and manufacturing overhead.
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Net Operating Income
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Net operating income is also called operating income or operating profit. It is equal to the business’s gross profit for the period in question minus its operating expenses for the same period. Operating expenses are the expenses that the business incurs in order to run the operations that turned products intended for sale into actual sales revenue. Such expenses can include rent, utilities, advertising and sales costs, and most other expenses not related to the acquisition of products.
Comparison of Gross Profit and Net Operating Income
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Gross profit and net operating income are not comparable figures but sums calculated in successive steps of the same mathematical formula. Gross profit is almost always higher than net operating income because it includes fewer expenses. It is theoretically possible for gross profit to be lower than net operating income if the business has negative operating expenses, but this is very unlikely considering how rare contra-expenses such as returned rent are. In sum, gross profit is sales revenue minus the acquisition costs of sold products, while net operating income is sales revenue minus those acquisition costs and the costs incurred in turning them into actual revenue.
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References
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