How to calculate operating profit

Published Thursday 23 July 2026

Table of contents

• What is operating profit?
• Why operating profit matters for your business
• The operating profit formula
• How to calculate operating profit
• Example of an operating profit calculation
• Operating profit vs gross profit vs net profit
• What's included and excluded from operating profit
• Operating profit margin
• How to improve your operating profit
• Track your operating profit with Xero
• FAQs on operating profit

Key takeaways

• Operating profit is what's left from your revenue after you subtract the day-to-day costs of running your business, so it shows how well your core operations perform.
• You work it out by taking gross profit and subtracting operating expenses and depreciation.
• Interest and tax sit outside operating profit, which keeps the figure focused on trading performance rather than financing or tax decisions.
• Tracking operating profit helps you compare performance over time and gives lenders and investors a clear read on your financial health.

What is operating profit?

Operating profit is the profit your business makes from its core trading activities, after you've paid the everyday costs of running it. It's also called operating income, and you'll often see it referred to as earnings before interest and tax (EBIT).

The figure sits on your income statement, also known as a profit and loss statement, between gross profit and net profit. Because it strips out interest and tax, it gives you a clean view of how profitably your business actually operates.

Why operating profit matters for your business

Operating profit is one of the clearest signals of your financial health, because it measures how much you earn from what your business actually does. If your operating profit is growing, your core activities are getting more efficient or more profitable.

It's also useful for comparing performance. You can track it month on month or year on year, and you can compare your business against others in your industry without interest, tax, or one-off items clouding the picture.

Lenders and investors pay close attention to operating profit too. It tells them whether your business can generate enough from its operations to cover its costs and grow, which shapes their confidence in backing you.

The operating profit formula

The operating profit formula is straightforward once you have your figures to hand. You start with gross profit, then take away the costs of running the business.

Operating profit = gross profit minus operating expenses minus depreciation.

Interest and tax are excluded, because they relate to how your business is financed and taxed rather than how it trades. That's what keeps operating profit focused on your day-to-day performance.

How to calculate operating profit

Working out operating profit is a short, repeatable process once your records are up to date. Follow these 4 steps to get to your figure.

1. Find your gross profit by subtracting the cost of goods sold from your total revenue.
2. Add up your operating expenses, such as wages, rent, utilities, and marketing.
3. Work out your depreciation for the period on assets like equipment and vehicles.
4. Subtract your operating expenses and depreciation from gross profit to get your operating profit.

Example of an operating profit calculation

A simple example makes the operating profit formula easier to picture. Imagine your business sold $20,000 of products and services over a period.

• It cost you $8,000 to provide those products and services, so your gross profit is $12,000.
• You paid $3,000 on rent, electricity, and phone charges to run the business.
• Subtracting that $3,000 from your $12,000 gross profit leaves an operating profit of $9,000.

Operating profit vs gross profit vs net profit

These three figures appear on the same income statement, but each answers a different question. Understanding the difference helps you read your numbers with confidence.

Gross profit is what's left after the direct cost of producing your goods or services. Operating profit goes a step further and also subtracts operating expenses and depreciation, so it reflects the cost of actually running the business.

Net profit is the final figure, after interest and tax are taken out as well. It's the amount your business truly keeps, while operating profit shows how well your core operations perform before financing and tax.

What's included and excluded from operating profit

Knowing which costs belong in the calculation keeps your operating profit accurate. The included items are the everyday costs of running your business.

• Cost of goods sold (COGS)
• Wages and salaries
• Rent and utilities
• Depreciation on assets used in operations

Some costs and income sit outside operating profit because they don't relate to core trading. The excluded items are the ones you leave out.

• Interest on loans and other financing costs
• Tax
• Income from selling assets or from investments

Operating profit margin

Operating profit margin turns your operating profit into a percentage, so you can see how much of every dollar of revenue you keep from operations. It's a quick way to gauge efficiency.

Operating profit margin = (operating profit divided by revenue) times 100.

A higher margin means more of your revenue survives your operating costs, which usually points to a healthier, more efficient business. Tracking the margin over time is a practical way to measure your profitability and spot trends before they affect your bottom line. It also sits alongside other profitability ratios that give you a fuller view of how your business performs.

How to improve your operating profit

Improving operating profit comes down to earning more or spending less on the costs of running your business. A few practical moves can make a real difference.

• Grow revenue by attracting new customers, raising prices where the market allows, or selling more to existing customers
• Reduce operating costs by reviewing suppliers, cutting waste, and questioning recurring expenses
• Streamline operations by automating repetitive admin so you spend less time and money on manual tasks

Wages are often one of the largest operating costs, and they've been climbing: according to Xero Small Business Insights, Australian small business wages rose 2.0% year on year in the December 2025 quarter. Keeping a close eye on costs like these, alongside your profit and loss statement, helps you protect your margin as expenses shift.

Track your operating profit with Xero

When your financial data stays up to date in one place, operating profit becomes something you can watch in real time rather than piece together at year end. Xero Accounting Software brings your revenue and costs together so your reports are ready when you need them, and you can get one month free to see how it works.

FAQs on operating profit

Here are answers to some frequently asked questions about operating profit to help you apply it with confidence.

Is operating profit the same as EBIT?

Yes, operating profit and earnings before interest and tax (EBIT) usually refer to the same figure. Both measure profit from core operations before interest and tax are taken out.

What is a good operating profit margin?

A good margin varies widely by industry, so it's best to compare against similar businesses rather than a single benchmark. Tracking whether your own margin is rising or falling over time is often more useful than any fixed target.

Where do you find operating profit on financial statements?

You'll find operating profit on your income statement, also called a profit and loss statement. It sits below gross profit and above net profit.

What's the difference between operating profit and operating income?

There's no difference; operating income is simply another name for operating profit. Different accounting sources use the terms interchangeably.