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;
- 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;
- 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.
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