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- Is it Operating Income or EBIT?
Call It What You Want - Operating Income or EBIT - Just Know and Implement The Metric in Your Business Metrics
Operating income is another very common and important profitability metric for every business under the sun.
It helps provide insight to business managers, operators, and owners on a company’s ability to generate profitability from its core business model and operations after accounting for all of the operating expenses - payroll, bonuses, tooling, cost of goods / revenue, materials - in a given business.
Some “intellectuals” or “enlightened” folks within the finance and business community also colloquially call operating income by an acronym - “EBIT.”
As an aside, I think most of this is done purposely by finance and business professionals to create an aura of being distinguished. They can then say that they contribute to dictionary entries like linguists or others do. 🤣
And I promise we’ll also define EBIT in the following sections, so stay tuned, so you can go toe-to-toe with the finance metric acronym folks.
What is Operating Income (EBIT), Why is it Important, and How to Understand it to Apply It In Practice
As mentioned, operating income is a common profit metric that represents earnings from revenue after deducting all operating expenses.
It can also be called EBIT or Earnings Before Interest and Taxes. This basically means that operating income represents all of the earnings that remain after deducting cost of revenue and all operating expenses, except for interest and taxes (which are two commonly argued and discussed operating vs. non-operating components / expenses).
Why is operating income important? Because it is the single most comprehensive indicator of a company’s profitability as it pertains to an organization’s core business model and its core operations.
For example, if you are evaluating two companies that operate in the same industry, and generally have the same revenue scale, size, and growth profile, but have widely different operating income profiles - you should immediately delve into the cost profile of each business to understand why one has a higher operating income metric and why the other lags behind.
If you are an operator of the business with the lower operating income, you can use this knowledge against a peer benchmark to effectuate change in your company’s cost structure. Perhaps you all need to increase revenue in different ways or make a serious change or evaluation of your cost structure. Perhaps you have wasted resources and investments. Whatever it may be, this insight helps provide you with a starting framework of how to drive change to other things that can either lead to revenue growth or more efficiency and effectiveness of your cost structure.
In the simplest of terms in common life, operating income can be compared to the amount of money that is left over from a person’s annual salary after accounting for all of their living expenses - rent, groceries, car expenses, and the sort.
Understanding Operating Income and How To Make the Most of It Is Easy As 1,2,3 With Valuate
In order to make impactful change within your business and its metric profile, you need to start with a strong foundation and baseline understanding of the basics, like operating income.
Luckily for you, Valuate makes these basic, fundamental concepts available for you at your fingertips and allows you to use them to compare yourself against other businesses in your industry.
From there, you can make changes and create action plans that your team members can collaborate on and build on.
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