How is Net Operating Income calculated?

Net Operating Income (NOI) is a key performance metric used in various fields, particularly real estate and business, to measure the profitability of an investment or operation before accounting for certain expenses. The correct calculation of Net Operating Income is found by taking the total revenue generated from an investment and subtracting the total operating expenses.

The key point in understanding why the correct calculation involves the inclusion of both the Cost of Goods Sold (COGS) and Operating Expenses lies in the definition of operating income. Operating income reflects the profit a company makes from its core business activities, and to achieve that, it is necessary to deduct all costs associated directly with generating that revenue.

Thus, by combining COGS with Operating Expenses, the calculation encompasses the total costs related to the day-to-day operations of the business, providing a clearer picture of operating profitability. This measurement is crucial for stakeholders attempting to analyze financial performance since it excludes elements like taxes and non-operating costs which do not reflect the operational quality of the business.

Understanding this concept will help solidify the rationale behind identifying and analyzing various components of income and expenses in business planning effectively.