What is operating profit?
Definition of operating profit
Operating profit is used to determine how profitable a business is on a day-to-day basis. It’s calculated by taking the income that a business receives from sales and subtracting the costs of sales and other administrative costs involved in the running of the business.
Unlike net profit, operating profit never takes into account any money leaving a business for taxes or interest payments, unless the interest is being treated as one of the business’s administrative costs.
How to calculate operating profit
A simple formula for calculating operating profit is:
Operating profit margin
A business’s operating profit divided by its total sales is known as its operating profit margin. This is an important metric as it shows how efficiently the business is being managed. Operating profit margin is always written as a percentage.
A simple formula for calculating operating profit margin is:
Operating profit vs. net profit
Businesses can choose to take additional costs such as taxes and interest into account when calculating net profit, whereas taxes are not used (and interest is not usually used) when calculating operating profit. If a business chooses not to take taxes or interest into account when calculating its net profit, or if it takes interest into account for both, then its net profit figure is likely to be similar or identical to its operating profit.
If you’re not sure how to use these metrics to help you make decisions for your business, speak to your accountant for advice.