Let’s Calculate Income from Operations for the Fish Shack
In the previous post on operating expenses, we calculated the total sales, cost of goods sold and operating expenses in our example of our Australian food shop. From those values, we can now calculate income from operations of the Fish Shack. The term “Income from Operations” is a calculation on how much income the company makes from their key business functions or operations. If the company generates a positive income, sales are larger than costs and expenses and the company generates a profit from operations. If the company has a negative operating income, sales are smaller than the total costs and expenses and the company has a loss from its operations.
From the previous examples, we found that total sales for the Fish Shack were $36,750.00 and cost of goods sold was $19,117.50. We also found that the total operating expenses from the month were $4550.00. To calculate income from operations of the company, we can subtract the cost of goods sold and operating expenses from the total sales.
Income From Operations = Sales – Cost of Goods Sold – Operating Expenses
Income From Operations = $36,750.00 – $19,117.50 – $4550.00 = $13,082.50
So, this means that after all expenses and costs to produce the products are accounted for, the company made an operating income of $13,082.50 from total sales of $36,750.00. Note that we haven’t yet subtracted non-operating income or taxes which we’ll go over next.
Non-Operating Income or Expense
Non-Operating Income is usually generated from financial activities like getting or having to pay interest. If the company has to pay interest, it would be classified as a non-operating expense. If the company receives interest, it is referred to as non-operating income. For the Fish Shack example, we’ll assume that the company has some extra cash which is being saved to get the company through the slow, non-tourist season. The extra cash is currently getting interest on it from the bank which is $50 per month. Since the Fish Shack is getting the interest, we’ll call it Non-Operating Income and include it on the income statement.
The Joys of Income Taxes in Small Business Finance Management
Small business income taxes are a complicated subject that could have thousands of lessons associated with it. Since I’m far from an expert in this field, I won’t go into any more detail other than saying that the income taxes for the Fish Shack are at a rate of 30%. To find the income tax amount for the month, we’ll add together the income from operations and the non-operating income and then multiply it by the tax rate as we do below:
Income Tax Amount = (Income From Operations + Non-Operating Income) x Tax Rate Percentage
Income Tax Amount = ($13,082.50 + $50.00) x 30% = ($13,132.50) x 0.30 = $3939.75
Now we can add all these values into our income statement to calculate the bottom line, which is the company’s total profitability! We’ll cover this in the next lesson.
Key Takeaway: We can calculate income from operations by subtracting costs and expenses from the company’s total sales. Non-operating income or expenses are typically charges from financing and income taxes are best left to a tax professional.