Operating profit is the revenue that a business makes from its sales, when operating costs have been subtracted. It indicates if a company is profitable or not.
Operating profit is the revenue you have from the sale of goods and services minus operating costs.
The operating profit is an indicator of a company’s profitability over a given period, typically a fiscal year. This number reflects the success or failure of the company’s core business operations. To be successful, you have to earn more than you’re spending; Your operating profit has to be higher than your operating costs.
How to work out if your business is profitable
The income statement shows profit and loss for the past fiscal year, also called tax year. It’s one of three important financial statements that shows the financial health of your business.
Revenue—your total income from the sale of products and services—is found at the top of an income statement, and to calculate operating profit you have to start here: Take the revenue and subtract operating costs, which can be divided into the categories fixed and variable costs.
Fixed costs are costs that stay the same regardless of sales and production, for example wage costs, rental costs and insurance. Variable costs depend on the amount of goods and services you produce and sell, for example raw material, shipping and sales commissions.
Once you subtract these costs, you end up with the operating profit.
Operating profit versus net income
The income statement also shows your net income. This is not the same as operating profit.
Operating profit shows how much your business has earned after operating costs have been subtracted, not including the cost of debt and taxes. Net income shows the earnings after all costs incurred in the period have been subtracted, including debt and taxes.