O is for Operating Profit

O is for Operating Profit

What does that mean?

Operating profit is the money left after paying all the business costs but before paying tax.

This is also known as EBIT (earnings before interest and taxes).

Formula;

GROSS PROFIT – OPERATING EXPENSES = OPERARTING PROFIT

A positive operating profit shows that your business makes more money than is spends.

The operating profit will be reduced by the amount of taxes you need to pay to calculate your net profit. (The net profit is the money you get to keep!)

Operating profit may be reduced by monthly (or annual) adjustments such as;

  1. Depreciation (an noncash expense which accounts for the wear and tear of assets)

Operating profit may be increased by monthly (or annual) adjustments such as;

  1. Interest payments (you can’t control these amounts so they aren’t included for this calculation)

EXAMPLE

Let’s do an example of an operating profit calculation

Your business sold £50k products or services.

It cost you £30k to provide the products or services.

Rent/electricity etc of your unit was £5k

Other costs such as phone and software £2k

Depreciation was £1k

Interest payments £500 (not included for operating profit calculation)

Sales £50,000

Costs £30,000

Gross profit £20,000

Other costs £7,000

Depreciation £1,000

Operating profit £12,000

Why is operating profit calculations important?

Operating profit measures the efficiency and profitability of a business based on its core functions.

Thank you for reading this weeks blog – O is for Operating Profit, see you next week.

Flo

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