What is operating income?

Operating income is income that arises from a company's ordinary business activities and forms the basis for measuring the company's operational profitability. Unlike financial income , which comes from investments and financial activities, operating income represents the value of goods and services that the company delivers to its customers.

Definition and Meaning of Operating Income

Operating income is all income generated through a company's main business and normal business operations. This income is crucial in assessing a company's ability to create value through its core activities.

Characteristics of Operating Income:

• Regularity: Occurs continuously throughout normal operation
• Predictability: Can be planned and budgeted
• Core business: Directly related to the company's main purpose
• Sustainability: Foundation for long-term profitability

Categories of Operating Income

Operating income can be divided into several main categories depending on the nature of the business and how the income is generated.

Main categories:

Category	Description	Examples
Sales revenue	Revenue from the sale of goods	Product sales, merchandise sales, merchandise
Service revenues	Revenue from services provided	Consulting fees, repairs, maintenance
Subscription revenue	Regular income from subscriptions	Software licenses, memberships, streaming
Rental income	Income from rental of assets	Premises, machinery, equipment
Royalty income	Revenue from licensing agreements	Patents, trademarks, copyrights

1. Sales revenue

Sales revenue is the most common form of operating revenue and includes all income from the sale of goods that is part of the company's ordinary activities.

Examples of sales revenue: * Retail: Sale of goods to end users * Production: Sale of manufactured goods to wholesalers or customers * Import/export: Sale of imported or exported goods

2. Service income

Service revenue arises when the company provides services as part of its main business.

Examples of service income: * Consulting companies: Advice and expertise * IT companies: System development and support * Accounting firms: Bookkeeping and accounting

Accounting for Operating Revenues

Operating revenues are recognized in accordance with the income recognition principle and must meet specific criteria in order to be recognized in the accounts.

Criteria for Revenue Recognition:

1. Control transferred: The customer has gained control of the product/service.
2. Performance met: The company has fulfilled its obligations.
3. Price fixed: The transaction amount is determined
4. Payment likely: It is likely that payment will occur
5. Risk transferred: Risk and rewards are transferred to the buyer.

Accounting example - Sales of goods:

When selling goods for NOK 100,000 (excl. VAT):

 Debet: Kundefordringer 125 000 (inkl. 25% mva)
 Kredit: Salgsinntekter 100 000
 Kredit: Utgående mva 25 000

Upon payment from customer:

 Debet: Bank 125 000
 Kredit: Kundefordringer 125 000

The Difference Between Operating Revenue and Other Types of Income

It is important to distinguish between operating income and other forms of income in the accounts to get an accurate picture of the company's operational performance.

Comparison of Income Types:

Income type	Source	Regularity	Accounting entry
Operating income	Main business	Regularly	Operating income
Financial income	Investments, interest	Variable	Financial income
Extraordinary income	One-off cases	Rare	Other income
Grants	Public support schemes	Variable	Government grants

Financial income vs Operating income:

Financial income includes: * Interest income from bank deposits * Dividends from investments * Gain on sale of financial instruments * Currency gains

Operating income includes: * All revenues from core business * Sale of goods and services * Rental income from operating assets * Royalty from business activities

Measurement and Analysis of Operating Revenues

Operating income is the basis for several important key figures used to assess a company's performance and profitability.

Important Key Figures:

Key figures	Formula	Importance
Operating margin	(Operating profit ÷ Operating revenue) × 100	Operational profitability
Sales growth	((This year's turnover - Last year's) ÷ Last year's) × 100	Growth rate
Gross margin	( Gross profit ÷ Operating income) × 100	Profitability before operating costs
Capital turnover	Operating income ÷ Average total capital	Efficiency in capital use

Example of Analysis:

Company A - Income Statement (simplified):

 Driftsinntekter: 5 000 000 kr
 Varekostnad: -3 000 000 kr
 Bruttofortjeneste: 2 000 000 kr
 Driftskostnader: -1 500 000 kr
 Driftsresultat: 500 000 kr

Key figures: * Gross margin: (2,000,000 ÷ 5,000,000) × 100 = 40% * Operating margin: (500,000 ÷ 5,000,000) × 100 = 10%

Practical Examples from Different Industries

Let's look at how operating income works in practice through examples from different industries.

Example 1: Retail

Situation: A clothing store with the following activities in 2024:

Operating income: * Clothing sales: 2,500,000 NOK * Sales of accessories: 300,000 NOK * Alteration services: 50,000 NOK * Total operating revenues: 2,850,000 NOK

Non-operating income: * Interest income from bank account: NOK 15,000 * Gain on sale of old equipment: NOK 25,000

Example 2: IT Consulting Company

Situation: An IT company with diversified revenue streams:

Operating income: * Consulting fee: NOK 1,800,000 * Software licenses: 600,000 NOK * Support and maintenance: 400,000 NOK * Training: 200,000 NOK * Total operating revenues: 3,000,000 NOK

Example 3: Production company

Situation: A furniture manufacturer with the following revenue structure:

Product category	Operating income	Share of total
Office furniture	4,500,000 kr	60%
Home furniture	2,250,000 kr	30%
Custom furniture	750,000 kr	10%
Total	7,500,000 kr	100%

Challenges and Pitfalls

When handling operating income, there are several challenges and pitfalls that companies must be aware of.

Common Challenges:

1. Revenue recognition at the right time
2. Premature revenue recognition can give misleading results

3. Late revenue recognition may underestimate performance

4. Classification of income

5. Distinguish between operating and financial income

6. Correct categorization of different types of income

7. Currency conversion

8. Handling of foreign operating income

9. Exchange rate fluctuations affect reported figures

10. Seasonal variations

11. Many businesses have seasonal fluctuations
12. Important to analyze trends over time

Best Practices:

• Consistent accounting: Use the same principles over time
• Documentation: Keep good documentation of all transactions
• Regular review: Analyze revenue trends monthly
• Internal control: Establish good control routines for revenue recognition

Operating income in the Annual Accounts

Operating revenues are presented in specific ways in the annual accounts in accordance with Norwegian accounting standards.

Presentation in the Income Statement:

Standard setup:

 RESULTATREGNSKAP

 DRIFTSINNTEKTER
 Salgsinntekter X XXX XXX
 Andre driftsinntekter XXX XXX
 Sum driftsinntekter X XXX XXX

 DRIFTSKOSTNADER
 Varekostnad -X XXX XXX
 Lønnskostnad -XXX XXX
 Avskrivninger -XXX XXX
 Andre driftskostnader -XXX XXX
 Sum driftskostnader -X XXX XXX

 DRIFTSRESULTAT XXX XXX

Note information:

Companies must provide additional information about operating income in the notes to the annual accounts:

• Geographical distribution of income
• Product categories or service segments
• Significant customer relationships (if relevant)
• Seasonal variations
• Accounting methods for revenue recognition

Tax Aspects

Operating income also has tax consequences that companies must be aware of.

Tax liability:

• Ordinary income: Operating income is included in the basis for corporate tax.
• Value Added Tax: Most operating income is subject to VAT.
• Withholding tax: Applies to salaries and fees

Timing:

• Accounting vs. tax accounting: There may be differences in timing
• Advance payments: Handling of received advances
• Long-term contracts: Special rules for large projects

Digitalization and Modern Challenges

Digitalization has created new challenges and opportunities for managing operating revenues.

New Revenue Models:

• Subscription models: Regular payments for services
• Freemium models: Free basic version, paid for premium
• Platform economy: Income from mediation between parties
• Data Monetization: Revenue from the sale of data and insights

Technological Solutions:

• Automated invoicing: Reduces manual errors
• Real-time reporting: Better overview of revenue streams
• Integrated systems: Linking sales, inventory and accounting
• AI and Machine Learning: Predictive Analysis of Revenue Trends

Conclusion

Operating income is the foundation of any business's finances and represents the value creation from its core business. Understanding what constitutes operating income, how it is accounted for and analyzed, is crucial for:

• Management: Making informed decisions about operations and strategy
• Investors: To assess the company's operational performance and potential
• Creditors: To assess the company's ability to service debts
• Tax authorities: Ensuring correct tax calculation

By following established accounting principles, implementing good control routines, and staying up to date on new developments, companies can ensure that their operating revenues are reported correctly and provide a true and fair view of the business's performance.

For more information on related accounting topics, see our articles on gross profit , depreciation, and bookkeeping .