What is net operating income?
Net operating income (NOI) is a financial metric used to measure the profitability of a business’s core operations. It’s calculated by subtracting operating expenses from gross operating income, excluding taxes, interest, and non-operating income or expenses. In simpler terms, NOI tells you how much profit your business generates from its day-to-day operations—before factoring in things like loans or investments.
For small business owners, understanding NOI is essential for evaluating financial health, making informed decisions, and planning for growth. If you want to streamline how you track payroll, labor costs, and expenses, Homebase payroll can help automate your financial processes and give you clearer insights.
How to calculate net operating income
The basic formula for NOI is:
NOI = Gross Operating Income – Operating Expenses
Let’s break that down:
- Gross operating income includes revenue from your core business operations (sales, services, or rental income if you’re in real estate)
- Operating expenses include costs like wages, rent, utilities, maintenance, inventory costs, and insurance—basically, all recurring expenses required to run the business
Example: If your business earns $500,000 in revenue and has $300,000 in operating expenses:
- NOI = $500,000 – $300,000 = $200,000
This $200,000 represents the income generated from business operations alone.
What’s included and excluded in NOI
Included in NOI:
- Sales or service revenue
- Rent from leased space (if applicable)
- Wages and salaries
- Utilities and supplies
- Maintenance and repairs
- Marketing and advertising
- Business insurance
Excluded from NOI:
- Income taxes
- Interest on debt or loans
- Depreciation and amortization
- Capital expenditures (new equipment or long-term investments)
- Non-operating income (like investment gains)
This separation helps give a clearer view of how well your business is performing operationally.
Why net operating income matters for small businesses
NOI helps small business owners:
- Measure operating profitability – Know how much your core business activities are earning
- Spot efficiency issues – High expenses and low NOI may signal it’s time to cut costs or raise prices
- Plan for growth – A healthy NOI gives you room to reinvest in your business
- Assess business value – Lenders and investors often look at NOI to evaluate performance
- Compare across periods – Use NOI to track trends month over month or year over year
It’s also commonly used in real estate and hospitality to assess property performance, since it excludes financing and taxes.
NOI vs. net income
While both are profitability metrics, they serve different purposes:
- Net operating income focuses only on income from operations, before interest and taxes
- Net income (aka the bottom line) includes all sources of income and all expenses, including taxes and interest
Because NOI strips away those external factors, it’s a more direct reflection of operational performance.
Tips for improving your NOI
Want to boost your business’s NOI? Consider:
- Reducing overhead – Audit your expenses and look for ways to cut costs without affecting quality
- Improving workforce efficiency – Use scheduling and time-tracking tools to avoid overstaffing
- Increasing prices strategically – Raise prices where demand allows to increase revenue
- Streamlining operations – Automate repetitive tasks or invest in tools that save time and money
The higher your NOI, the stronger your foundation for growth and long-term success.
How Homebase helps you manage costs and track profitability
Understanding your NOI is easier when your business data is organized and accessible. Homebase payroll helps you track labor costs, manage time sheets, and stay on top of employee expenses—so you can get a clearer picture of your operating expenses.
With Homebase, you can:
- Track employee hours and wages in real time
- Generate payroll reports and view labor costs by role or location
- Stay compliant with tax laws and automatically file payroll taxes
- Export data to your accounting software for easier financial reporting
Explore Homebase payroll to get better visibility into your business’s financial health and free up time to focus on what matters most.