Strong net operating income and weak net income means the problem is not your business, it is your financing or your taxes. Stephen Brown separates the two, walks the expense flow from COGS through cost of sales to overhead, and runs a $5 million example where $1 million of operating income becomes $500,000 after interest and taxes. Knowing which number is slipping tells you where to look.
Profitability
Net Operating Income vs Net Income: Understanding Ecommerce Profitability
3 min
Transcript
0:00 What net operating income is
I'm Stephen with LedgerGurus, and in this video I'm going to explain net operating income, or NOI, and net income, specifically for ecommerce businesses.
Making a sale feels fantastic, but how much of that sale results in profit? Understanding the flow of expenses and how it gets down to net income is important.
Net operating income represents the profit your business makes after reducing your cost of goods sold, after reducing your cost of sales, your overhead expenses, but not your other income and expenses. It is the core profitability of your business.
0:30 COGS, cost of sales, and overhead
COGS represents the cost of producing your product and getting it to your warehouse ready to sell.
Cost of sales are expenses, but they're sale related. That could be things like packaging, that could be things like shipping, advertising, merchant service fees, all the expenses that are related to the sale that are not cost of goods sold.
Operating expenses include things like your rent, your salaries, your software subscriptions, and all the other expenses that aren't related to sales.
0:57 How net income differs
Now, you might wonder, isn't net operating income the same as net income? Not quite.
While net operating income focuses on your core business's income and expenses, your net income will include other income and expenses. Think of net operating income as your business's core performance, and net income is the final money you take home after all income and expenses. Both are important, but offer different insights.
1:19 Why the difference matters
So why should you care about the difference? By focusing on your net operating income, you can understand how your core business is performing outside of other financial factors. If your net operating income is strong but your net income is not, there may be an issue with taxes or financing that is dragging you down.
For instance, imagine you have a Shopify store and you've had a great month with lots of sales. After COGS and expenses, you find you have a positive net operating income. That's a sign your core business is healthy. But then you have a loan you need to pay, you have your taxes. This might significantly reduce your net income even though your core business is healthy.
1:52 A $5 million example
Let's walk through an example for an ecommerce business. Imagine your ecommerce business had $5 million in sales this year. Now, let's say the combination of your COGS and expenses came out to $4 million. You have a resulting $1 million in net operating income. Pretty straightforward, right?
But we're not done yet. Let's say you have a hundred thousand dollars in interest expenses, and then another $400,000 of taxes. Doing the math comes out to $500,000 in net income. That's the money that you actually get to keep to reinvest in the business or put into your pocket.
Understanding the flow from revenue to net operating income to net income is crucial for making informed decisions about your business's growth and strategy.
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