Tag: Operating

  • Operating margin Vs Gross margin calculation

    Operating margin Vs Gross margin calculation

    Operating margin Vs Gross margin measures a company’s profitability by calculating the ratio of operating income to net sales. It is also known as operating income margin, operating margin, earnings before interest and taxes (EBIT) margin, or return on sales (ROS). Businesses calculate operating margins by deducting the cost of goods sold (COGS), operating, depreciation, and amortization costs from net sales. Accounting software calculates and analyzes operating profit margins to help businesses visualize real-time revenue for every dollar of sales revenue.

    What is the Operating margin Vs Gross margin? Importance and calculation formula

    Operating profit = operating income – operating costs – taxes and surcharges – sales expenses – management expenses – financial expenses – asset impairment losses – credit impairment losses + gains from changes in fair value (-losses from changes in fair value) + investment income (-losses on investments ) + income from asset disposal (- loss from asset disposal) + other income

    Operating profit ratio = (operating profit/operating income) × 100%. The operating profit ratio indicates the ability of the enterprise to obtain profits through production and operation. The higher the ratio, the stronger the profitability of the enterprise.

    Extended information:

    In addition to being affected by the income from sales of goods, the operating profit is also affected by the price difference between the purchase and sale of goods sold, tax on goods sales, variable expenses of goods sales, and fixed expenses that should be borne by goods sales. The impact of these factors on the profit of commodity sales can be expressed in the following way.

    The Importance of Operating Margins

    A company’s operating margin indicates the profitability of the core business and enables stakeholders to assess an organization’s ability to pay fixed costs such as interest and taxes. Operating margins are also critical for businesses looking to optimize resource allocation based on revenue forecasts.

    How are stakeholders using operating profits to make decisions?

    • Investors: Identify growing or shrinking profit and spending patterns
    • Analysts: Assess stock value, and a company’s ability to pay for equity and debt investments
    • Senior Leadership Team (SLT): Benchmarking the Competition with Operating Margin
    • Managers: Gain insight into variable costs and decision effectiveness

    Operating Margin Formula

    The operating margin formula helps companies measure the overall business health and profitability of their core business. Business managers consider operating margin in conjunction with free cash flow, net profit, and gross profit.

    Operating profit margin = (operating income – net sales income) X 100%

    Operating income is the profit a business makes after deducting various expenses. Such as the cost of goods sold, general and administrative (G&A) expenses, depreciation, marketing, research and development, and other operating costs. Operating income helps a business determine net income before interest and taxes for a specific period. Net sales revenue is gross revenue or gross sales minus sales returns, discounts, and allowances. Net sales figures appear under direct costs on the income statement and are critical to an organization’s revenue growth.

    What is a good operating margin?

    Operating margins vary across industries due to varying levels of competition, efficiencies of scale, and capital structures. Operating efficiencies vary across industries, as do operating margins. That’s why it’s unfair to compare two different industries. Excellent operating margins that increase over time while remaining positive. Companies striving to achieve superior operating profit must improve unit economics and remain competitive and relevant.

    What does gross margin mean?

    The gross profit margin is an important indicator to measure the profitability of a company. Usually, the higher the gross profit margin, the higher the profitability of the enterprise and the stronger the ability to control costs.

    This also reminds us that when choosing stocks, we can pay attention to the company’s gross profit margin. Companies in the same industry, when other indicators are close, choose companies with high gross profit margins as much as possible, and the probability of choosing a good company will be higher.

    Gross profit margin refers to the proportion of how much money can be used for the next period after deducting the cost of sales from each yuan of sales revenue. The ratio of gross profit to merchandise sales revenue. Usually expressed as a percentage. It can be calculated by one commodity, or comprehensively by commodity category.

    Refers to the percentage of gross profit in sales revenue, also referred to as gross profit margin, where gross profit is the difference between sales revenue and sales cost.

    Calculation formula:

    Calculation formula: gross profit margin = (operating income – operating cost) / operating income * 100%

    Sales gross profit margin = sales gross profit / sales revenue × 100% = (sales revenue – sales cost) / sales revenue × 100%

    The gross profit margin is an important indicator to measure the profitability of a company. Usually, the highest gross profit margin indicates that the higher the profitability of the enterprise, the stronger the ability to control costs.

    How to Improve Operating Margins

    A healthy operating margin is critical to financial stability. Companies with higher operating margins are less likely to be exposed to risk and will constantly seek to improve margins. These organizations use the following practices to increase their operating margins.

    • Analysis category fees. Companies can improve operating margins by identifying key expenses from the business expense ledger and aligning these expenses with gross revenue.
    • Create economies of scale. Identifying process integration opportunities is another great way to improve profits. This integration requires careful evaluation, analysis, and transformation of existing processes so that new processes generate more revenue.
    • The pruning operation is wasteful. Conducting regular audits helps companies identify lengthy production processes and control the use of raw materials. Minimizing operational lag through the synchronization of production processes is key to improving the efficiency of business operations.

    Operating Margin vs Gross Margin vs Net Margin

    Operating margin evaluates operating efficiency by finding the company’s profit after variable costs are paid for. The metric does not take interest or taxes into account. Businesses looking to improve operating profits use resources efficiently, set product prices, and improve management controls.

    Gross margin is the ratio of gross profit to total revenue. Gross margin analysis is an effective way to understand production efficiency and gross profit per dollar of revenue. Product-based companies regularly analyze gross margins to see improvements or declines in product margins over time. Net profit margin measures net income or profit per dollar of revenue. This metric is an excellent benchmark for evaluating a company’s ability to generate profits from sales, including overhead and operating costs.

    What is the difference between gross profit margin and net profit margin?

    Nature is different:

    The gross profit rate is the ratio of the company’s gross income after removing the direct cost of the product (without removing the three fees and other costs such as income tax), so it is called the gross profit rate. The net interest rate is also the higher the long-term growth, the better. If the growth of net profit is faster than the growth of revenue, the net profit rate will increase, indicating that the company’s profitability is increasing; otherwise, it indicates that the company’s profitability may be declining.

    Different meanings:

    A high gross profit margin indicates that the company’s products are highly competitive in the market, which means that consumers are willing to pay a higher price than similar products to buy the company’s products. The net profit rate is also a good static indicator for assessing the management ability of the company management because only good management can gradually reduce the company’s three expenses, thereby saving more profits for the company and shareholders.

    Different calculation methods:

    Gross profit margin = gross profit / operating income × 100% = (main business income – main business cost) / main business income × 100%, net profit rate = net profit / main business income × 100% = (Total profit – income tax expenses) / main business income × 100%.

    Operating margin Vs Gross margin calculation Image
    Operating margin Vs Gross margin calculation; Photo by PiggyBank on Unsplash.
  • Operating cash flow its type and importance

    Operating cash flow its type and importance

    Operating cash flow (OCF) is the cash a business generates through routine operating activities, such as service delivery, marketing, hiring, and payroll, over a specified period. OFC represents a company’s ability to make money in the short and long term. Focusing on operating cash flow metrics helps businesses understand whether they can continue to grow and expand their business. OCF is also important for assessing overall organizational performance and financial health.

    Here are the articles to explain, What is operating cash flow? type and importance

    For any business to generate income, it must maintain a positive operating cash flow daily as it is directly related to net income. Cash flow management software helps companies and accounting teams manage money coming in and going out. It can also forecast future cash flows using historical financial data as a reference point.

    Type of cash flow

    Cash flow measures how much money is moving in and out of a company. A business considers valuable when it can generate positive cash flow or have more inflows than outflows.

    • Operating Cash Flow: Cash collected from regular business operations, including sales of goods, rent, wages, overhead, etc.
    • Investing cash flows: The funds used to purchase capital assets and securities such as stocks, bonds, and related holdings are investing cash flows. Cash flow into the company comes primarily from interest and dividends paid on these holdings.
    • Financing cash flows: Cash generated from the capital, external investments, and loans are financing cash flows. It also includes amounts recovered from debt and equity and additional corporate payments.
    • Free Cash Flow (FCF): The money left over after a business pays its operating expenses (such as salaries and taxes) is called free cash flow. Companies can spend their FCF however they want. Operating free cash flow often provides great insight for investors when reviewing business plans and making investment decisions based on the company’s financial efficiency.

    The importance of operating cash flow

    OCF is a major component of any financial analysis as it demonstrates the sustainability and financial stability of a business. Since operating cash flow takes into account day-to-day activities, it is necessary to determine whether current transactions are profitable.

    OCF is an integral part of a company’s earnings assessment. It focuses on cash items that can help determine whether a business will need outside funding or investment shortly.

    If an organization generates significant operating cash flow but reports a lower net income value, this implies an increase in the number of fixed assets and accelerated depreciation throughout the transaction.

    Operating cash flow is important for the following stakeholders to make sound business decisions:

    • Financial Analysts: OCF is interested in analysts because it indicates whether a company is financially stable and profitable.
    • Investors: OCF helps investors decide whether a business is worth their capital and offers them a good return on their investment.
    • Lenders: Financial institutions such as banks, loan unions, and credit unions evaluate OCF values ​​to determine an organization’s creditworthiness and financial responsibility for lending.

    How to Present Operating Cash Flow

    They are usually the first part of the financial statements, reported under the statement of cash flows, and include investing and financing cash flows. There are two ways of describing operating cash flow.

    Indirect method:

    The indirect method first adjusts net income at the bottom of the income statement to the cash basis. Net income needs to adjust because most businesses report on an accrual basis, which means there are small financial gains over time.

    Non-cash items such as depreciation, amortization, accounts receivable (AR) and accounts payable (AP) add to arrive at the cash figure. When a company raises an AR increase, revenue generates but cash has not yet been received. In this case, the AR value must subtract from net income to understand the true cash impact on the business.

    Likewise, an increase in AP indicates that expenses incurred have not been repaid. This results in the AP amount being added to net income to determine the actual cash impact.

    Direct Method:

    The direct method expresses operating cash flow and starts by recording cash-based transactions and tracking them during the accounting period.

    When using the direct method to display the OCF value, the company still needs to separately perform the indirect method of operating cash flow to reconcile funds to obtain absolute cash figures.

    Items included when presenting OCF by the direct method:

    • employee salary
    • Vendors and Vendor Payments
    • cash collected from customers
    • Interest Income and Dividends
    • Income tax and related interest payments

    How to Calculate Operating Cash Flow

    Reading cash flow and income statements can be challenging without knowing how to calculate the different metrics. Financial analysts can measure how a business conducts cash-based transactions by calculating operating cash flow.

    While the simplest form of calculating OCF is Gross Revenue Operating Expenses, the formula may vary from business to business. Every organization has different non-cash items, changes in assets, and financial liabilities. Regardless of how OCF calculates, all items on the income statement and balance sheet must consider.

    Calculate the change in operating cash flow:

    • OCF = Net Income + Non-Cash Expenses – Increased Working Capital
    • OCF = Net Income + Depreciation + Stock-Based Compensation + Deferred Taxes + Other Non-Cash Items – Increased AR – Increased Inventory + Increased AP + Increased Accruals + Increased Deferred Revenue
    • The operating cash flow ratio is a measure of whether a company can use the cash it generates to pay its current liabilities. It helps in assessing the short-term liquidity of a business with a transparent view of the company’s total revenue.

    OCF Ratio = Operating Cash Flow / Current Liabilities

    Operating Cash Flow Example

    Let us take a simple example to better understand cash flow from operations. A small business collects $50,000 in cash from its customers. It spent $2,500 on marketing, skills training, and advertising. Assume its current office space depreciates by $1,000 in the same fiscal year, while taxes are $12,500.

    Net income = $50,000 – $2,500 – $1,000 – $12,500

    Net Income = $34,000

    OCF = Net Income + Depreciation

    OCF = $34,000 + $1,000

    So OCF – $35,000.

    Operating cash flow vs. net income vs. cash earnings per share

    • Several financial indicators help assess the economic performance of a business. But two common metrics that stand often confused with OCF are net income and cash earnings per share (cash earnings per share).
    • Operating cash flow takes into account the amount of cash generated from normal business activities. It is part of the cash flow statement and calculates on an accrual basis.
    • Net income is gross income from sales, including investments and excluding expenses. The main difference between OCF and net income is the way a company recognizes revenue over a certain period and matches expenses to that revenue.
    • Both OCF and net income may be higher or lower depending on the type of financial principle and when it measures.
    • Cash earnings per share is a measure of cash flow based on the number of shares outstanding. Cash EPS indicates operational stability and helps to compare business and financial trends in the market.
    What is operating cash flow type and importance Image
    What is operating cash flow? type and importance; Photo by Tima Miroshnichenko from Pexels.
  • Operating Systems: Meaning, Definition, Types, and Advantages

    Operating Systems: Meaning, Definition, Types, and Advantages

    Operating Systems essay: The OS is that the program, which usually installed into the pc by a boot program. An OS is the heart of any computer without which it cannot useable and bear with. It provides all the resources to software, manages the hardware, and equipment all standard services for computer programs. It manages all other programs on the pc. Sometimes it is also called “OS”. These programs are also called applications. the appliance uses the OS by making requests for services through API (Application Program Interface). Sometimes users can directly use the OS through GUI (Graphical Users Interface) or query language. The OS may be a program that permits you to figure with hardware and software on your computer.

    Operating Systems essay; Meaning, Definition, Types, Functions, Advantages, and Disadvantages.

    Basically, there are two ways to use the OS on your computer; the 2 ways are as follows: 1] for ex., DOS, you A text commands, and therefore the computer gives answer you consistent with your command. this often calls a command-line OS. 2] With a GUI (Graphical User Interface) OS (ex., windows). You relate with the pc through a graphical [Do you want to buy the best Graphics Card for your gaming computer? Gigabyte GeForce RTX 2070 SUPER WINDFORCE OC 3X Graphics Card] interface with pictures and buttons by using the mouse and keyboard.

    An OS may be software that permits the pc hardware to speak and perform with computer software. Most desktops [Dell case study] or laptops come to preload or pre-installed with Microsoft windows os. Macintosh computers are loaded with Mac OS. Many computers or servers use the Linux or UNIX OS. The OS is that the very first thing loaded on the pc – without an OS (OS) the computer is useless and that we can’t do any functions thereon. Now at the instant, operating systems have begun to use OS in small computers also.

    If we mess with electronic devices, we will see the OS in many of the devices, which we use a day, from mobile phones to wireless access points. the pc use in these little devices is more powerful and that they can easily run the operating systems and applications of it. the most aim of the OS is to arrange and control the hardware and software so that the device behaves flexibly.

    All computers don’t have operating systems, for EX – the pc that controls the microwave in your kitchen doesn’t need an OS to figure because it’s just one set of jobs to try to; the foremost common window operating systems developed by Microsoft. There are many other operating systems available for special-purpose applications, including manufacturing, robotics, and mainframes, and so on.

    Types of Operating Systems:

    Within the family of the operating systems, there are four sorts of operating systems supported the kinds of computers. The categories are:

    Real-time OS (RTOS):

    A real-time OS wont to control machinery, scientific instruments, and industrial system. An RTOS hardly features a little user-interface capacity and no end-user utilities. a really important part of an RTOS is managing the property of the pc so that particular operations execute within the same amount of your time. during a complex machine, having a neighborhood move more quickly simply because system resources are available could also be even as catastrophic as having it’s going to not move in the least because the system is busy.

    Single-user, single task:

    As the name implies, this OS means to manage the pc so that one user can do one thing at a time. The Palm OS for Palm handheld computers may be an exemplar of a contemporary single-user, single-task OS.

    Single-user, multi-tasking:

    This is a really popular OS; most of the people use this operating system on their desktop and laptop today. Microsoft’s Windows and Apple’s Mac OS are both samples of single-user, multi-tasking OS. it’ll let one user have several programs operational at an equivalent time. for instance, it’s possible in Windows to write down a note in Microsoft word while downloading a file from the web while printing the text on the e-mail message.

    Multi-user:

    A multi-user OS allows many users to require advantage of computer resources simultaneously. The OS makes sure that the wants of the varied users balanced, and every one of the programs they’re using has sufficient and separate resources so that the matter with one user doesn’t affect the community of the users. UNIX, VMS, and mainframe operating systems, like VMS, are samples of the os. It’s important to differentiate multi-user OS s and single-user operating system that supports networking. Windows 2000 can support hundreds or thousands of networked users.

    Operating Systems Meaning Definition Types Functions Advantages Disadvantages Image
    Operating Systems; Meaning, Definition, Types, Functions, Advantages, and Disadvantages; Image from Pixabay.

    Functions of operating systems:

    The OS plays an important role when it involves starting and shutting down the pc which additionally refers to as booting. Six steps happen when a computer is booting: the primary step begins as soon because the computer turns on, the electrical signal reaches to the components within the system unit through the facility supply. During the second step, the processor chip is reset thanks to the electrical signal then it locates the ROM that contains the essential input/output system (BIOS), which may be a firmware that contains the startup instructions of the pc.

    Next, the BIOS launches a series of tests to make sure the hardware functioning and connect properly, referred to as the power-on self-test (POST), usually when the POST launches, the LED lights of the devices flicker, sometimes there’ll be messages displaying on the screen. The fourth step takes place when the POST compares the result with the complementary metal-oxide-semiconductor (CMOS) chip data. CMOS uses battery power to preserve the knowledge, data, and memory when the pc shuts down.

    Besides that, it detects new devices and identifies them when these devices connect to the pc. The “beep” sound usually results when the CMOS detects which later follows by the error messages. The fifth step proceeds when the POST completes with none interference where the BIOS will locate the OS files also referred to as the system files from any source of drive. The sixth step occurs when the system file find, which then loaded into the RAM from its storage alongside the kernel of the OS.

    Continuous part 1:

    The system file then launches, and eventually, the OS which was stored in memory takes control of the entire computing system. During the ultimate step, the OS loads the knowledge set. a particular OS may request for user ID and password. After the OS is installed and loaded, it displays and presentation the desktop screen and it starts up the background procedure.

    The second function of the OS is by providing an interface. the 2 sorts of interface are the graphical interface (GUI) and therefore the command-line interface. The GUI basically provides users with a simple thanks to performing a command or task by having the menus with buttons or other pictures to permit users to click it with ease. rather than having simple buttons to click on, advanced users work with a command-line interface to configure, manage, and troubleshoot devices and other software. The command-line interface works only by keyboard with commands by using the available keyboard or touchscreen. To perform such command, one must type within the commands accurately with the precise spellings and punctuations.

    OS also manages programs. It depends on certain OS, some OS can only run one program at a time, while some can run up to thousands of programs at an equivalent time with one or multiple users. There is the only user/single-tasking OS, single-user/multitasking OS, multiuser OS, and therefore the multiprocessing OS. When one multitasks, the program that’s actively employed by the user claim to be within the foreground, while the opposite programs know to be within the background.

    Continuous part 2:

    The OS’s fourth function is memory management. The OS does so by transferring the info and program instructions from the RAM to the hard disc once they aren’t needed at the instant because sometimes there’s only limited space for the RAM when it’s to perform other functions when an equivalent data and program instructions need again, the OS then transfer them from the hard disc to the RAM.

    The fifth function of the OS is to adjust and coordinating tasks of useable hardware by software. Because the phrase implies, the OS determines the order of the tasks which process. Users can adjust or set the priority of certain tasks, which ends up from the opposite tasks to line up until the preceding task perform.

    Every hardware features a driver that acts sort of a manual. The sixth function, during this case, allows the pc to spot and install it without having the pc to thoroughly “learn” all the small print of the hardware. With the Plug and Play technology today, the OS can automatically configure the new devices because the devices are installed on the pc.

    Continuous part 3:

    The OS is additionally vital by providing a uniform way for software to affect hardware without having the pc to thoroughly learn all the small print of the hardware. The OS interacts with the hardware via drivers. a simple example would be installing a printer on many computers.

    The seventh function allows the user to simply hook up with the web rather than having to configure the tedious broadband service. OS can automatically configure the web connection.

    The OS also function as a performance monitor, which during this case identify and reports information about the software or the devices of the pc.

    Advantages or Benefits of operating systems:

    There are different types of operating systems that transform over time. As each OS has its benefits and drawbacks, that’s the rationale new operating systems are developing. Now let’s check out the subsequent Benefits and advantages of an OS.

    Computing Source:

    An OS acts as an interface between the user and therefore the hardware. It allows users to input files, process it, and access the output. Besides, through the OS, users can communicate with computers to perform various functions like arithmetic calculations and other significant tasks.

    User-Friendly Interface:

    Windows OS, when it came into existence, also introduces Graphical interface (GUI), which made using computers far more natural than earlier instruction Interface. Moreover, users can speedily and easily understand, interact, using, and communicate with computer machines.

    Resource Sharing:

    Operating systems allow the sharing of knowledge and useful information with other users via Printers, Modems, Players, and Fax Machines. Besides, one user can share equivalent data with multiple users at the corresponding time via mails. Also, various apps, images, and media files are often transferred from PC to other devices with the assistance of an OS.

    No Coding Lines:

    With the invention of GUI, OS allows access to hardware, without writing and reading programs. Unlike, earlier users don’t need to write code of lines to access the hardware functionality of a computing system.

    Safeguard of Data:

    There are tons of user data stored on the pc, which can only access with the assistance of an OS. Besides, storing and accessing the info, another important task of an OS is to securely and securely manage the info. for instance, Windows Defender in Microsoft Windows detects malicious and harmful files and removes them. Also, it secures your data by storing them with a touch to bit encryption.

    Software Update:

    An OS may be software that must update regularly to regulate high fleeting features that are continually increasing. With other apps and software hitting updates to enhance their functionality, OS must improve their benchmarks and handle all the working of a computer. An OS can easily update with none complexity.

    Multitasking:

    An OS can handle several tasks simultaneously. It allows users to hold out different tasks at an equivalent point in time.

    Disadvantages or Limitations of operating systems:

    Now let’s check out the subsequent Limitations or disadvantages of an OS.

    Expensive:

    When we compared to the open-source platforms like Linux, Ubuntu, macOS, etc. some operating systems are costly. While users can use a free OS but generally they’re a touch difficult to run than others. Moreover, operating systems like Microsoft Windows with GUI functionality and other in-built features carry a costly tag.

    System Failure:

    If the central OS fails, it’ll affect the entire system, and therefore the computer won’t work. Moreover, an OS is the heart of a computing system without which it cannot function. If the central system crashes, the entire communication is going to halt, and there’ll be no further processing of knowledge.

    Highly Complex:

    Operating systems are highly complex, and therefore the language wont to establish these OS aren’t clear and well defined. Besides, if there’s a problem with OS users cannot directly understand, and it can’t be resolved quickly.

    Virus Threats:

    Threats to the operating systems are higher as they’re hospitable such virus attacks. Many users download malicious software packages on their system which halts the functioning of OS and slows it down.

    Fragmentation:

    Fragmentation within the computer may be a state when storage memory breaks into pieces. Internal fragmentation occurs when the tactic of the process is larger than the memory size. External fragmentation occurs when the tactic or process eliminates.