See Also:
Operating Income (EBIT)

Operating Income Example

For example, Marilyn is the CEO of a company which creates educational children’s toys. Marilyn loves her work and truly knows her business. With the support of her family and local bank Marilyn has taken her idea from startup to success in only 3 years. Pleased with her achievement, she wants to maintain what she has created.
Marilyn has come upon the bank period for the loan she has taken to start her business. She is almost finished with paying her liability and wants to make sure she exits the deal on good terms. Marilyn needs to make sure all of the financial ratios in her loan agreement are satisfactory in the view of her bank. This mainly revolves around her company operating margin.
Marilyn contacts her accountant. She needs to access her financials in order to find her EBIT to assure it is complaint with the loan covenant. Her company results are listed below:
$1,000,000 in revenues; $250,000 in cost of goods sold; and $100,000 in operating expenses.
EBIT = $1,000,000 – ($250,000 + $100,000) = $650,000
Marilyn then reviews her paperwork with the bank. She finds that she is complaint with their requirements and will soon be able to complete both interest and principal payments. She is extremely relieved because she is lifting a huge weight off of her shoulders. Additionally, she is in good standing with the bank and could use them as a source for capital to grow her business further. She is excited about what the future holds for her experience as an entrepreneur.

Operating Income Calculation

Operating income calculations simply involve addition and subtraction. When performed properly they serve great value with a relatively little amount of effort.
Example: A company has $1,000,000 in revenues; $250,000 in cost of goods sold; and $100,000 in operating expenses.
EBIT = $1,000,000 – ($250,000 + $100,000) = $650,000
For more tips on how to improve cash flow, click here to access our 25 Ways to Improve Cash Flow whitepaper.