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 is calculated by taking the income that a business receives from sales and subtracting the cost of sales and other costs involved in the running of the business (i.e. administrative expenses).

A healthy operating profit figure is a good indicator that a business is being run effectively. Operating profit is also a starting point for net profit calculations.

Operating profit formula

A simple formula for calculating operating profit (OP) is:

Sales revenue - cost of sales - administrative expenses = OP

Operating profit doesn’t take into account any money entering or leaving a business through drawings, taxes, interest payments, or additional income earned through investments.

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FreeAgent's Chief Accountant Emily Coltman is available to answer your questions in the comments.