Operating profit: definition, formula and how to calculate it

Published Thursday 23 July 2026

Table of contents

• What is operating profit?
• Operating profit formula
• How to calculate operating profit
• Operating profit vs gross profit and net profit
• What is a good operating profit margin?
• Why operating profit matters for your business
• How to improve your operating profit
• Track your operating profit with Xero
• FAQs on operating profit

Key takeaways

• Operating profit is the money left after paying all business costs, but before paying tax.
• You work it out by subtracting operating expenses from gross profit, and it's also known as earnings before interest and tax (EBIT).
• Operating profit margin shows how much of your revenue turns into operating profit, which helps you compare performance over time.
• Tracking operating profit helps you set prices, control costs, spot problems early, and show lenders your business is healthy.

What is operating profit?

Operating profit is the money left after paying all business costs, but before paying tax. It shows that your business can generate more money than it spends on day-to-day running costs.

You still have tax to pay before you reach net profit, which is the money you get to keep. So operating profit sits between what you earn and what you finally take home.

Operating profit is also known as earnings before interest and tax (EBIT). Interest and tax are excluded because they aren't part of your core operations, and a business doesn't set its own interest rates or tax rules.

Operating profit formula

The operating profit formula builds on your gross profit. Once you know your gross profit, you subtract your operating expenses to get there.

Here are the two calculations you need:

• Operating profit = gross profit − operating expenses
• Gross profit = revenue − cost of goods sold (COGS)

Depreciation counts as an operating cost, so it's included in your operating expenses. Interest and tax are excluded, which is why operating profit is the same as EBIT.

How to calculate operating profit

To calculate operating profit, you start with revenue and work down through your costs. The steps below use an Australian small business example so you can follow the maths from start to finish; for more detail you can also read this guide on how to calculate operating profit.

1. Add up your total revenue for the period. In this example, revenue is $300,000.
2. Work out your cost of goods sold (COGS). Here, COGS is $180,000.
3. Subtract COGS from revenue to find gross profit: $300,000 − $180,000 = $120,000.
4. Add up your operating expenses, such as rent, salaries, and utilities. In this example they total $60,000.
5. Subtract operating expenses from gross profit: $120,000 − $60,000 = $60,000. That's your operating profit.

Operating profit vs gross profit and net profit

Gross profit, operating profit, and net profit each measure profitability at a different stage. Knowing the difference helps you see exactly where your money goes.

• Gross profit = revenue − cost of goods sold (COGS)
• Operating profit = gross profit − operating expenses
• Net profit = what remains after interest and tax

So gross profit shows what's left after the direct costs of making your product or service. Operating profit then accounts for the wider running costs, and net profit is the money you keep once interest and tax are paid.

What is a good operating profit margin?

Operating profit margin turns your operating profit into a percentage of revenue, which makes it easier to track over time. The formula is operating profit margin = (operating profit ÷ revenue) × 100.

Using the example above, that's ($60,000 ÷ $300,000) × 100, which gives an operating profit margin of 20%.

There's no single "good" margin, as it varies widely by industry. For context on how Australian small businesses are tracking, ABS data to March 2025 showed the median operating profit margin for small businesses improved a little over the year and stayed broadly stable across most industries, with the majority of small businesses remaining profitable, according to the Reserve Bank of Australia.

Why operating profit matters for your business

Operating profit tells you whether your core business is actually making money, separate from tax and financing. That makes it one of the most useful numbers for running your business day to day.

Keeping an eye on it helps you in a few practical ways:

• Set prices with confidence, because you can see how much each sale contributes after costs
• Control spending by spotting which operating expenses are eating into your profit
• Catch problems early, before a shrinking margin turns into a cash flow squeeze
• Show lenders a clear picture of performance when you apply for finance

How to improve your operating profit

Improving operating profit comes down to earning more, spending less, or working more efficiently. Small, steady changes across these areas often add up to a healthier margin.

• Increase revenue by adjusting pricing, adding services, or reaching new customers
• Reduce costs by reviewing suppliers, cutting waste, and renegotiating contracts
• Streamline operations by automating manual admin so your team spends time on higher-value work

Staying on top of these levers is easier with clear visibility over your numbers, which is where good habits for managing finances and cash flow pay off.

Track your operating profit with Xero

When you can see your operating profit in real time, it's far easier to price well, control costs, and make confident decisions. Xero brings your revenue and expenses together in one place so your profit figures stay up to date.

Try Xero accounting software to keep your operating profit in view all year round, and get one month free.

FAQs on operating profit

Here are answers to some frequently asked questions about operating profit to help you put it into practice.

Is operating profit the same as EBIT?

Yes, operating profit is also called earnings before interest and tax (EBIT). Both measure your profit from core operations before interest and tax are applied.

What's excluded from operating profit?

Operating profit leaves out interest, tax, and one-off items that aren't part of your core operations. It focuses only on the revenue and costs you control day to day.

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

Operating profit is what's left after operating expenses but before interest and tax. Net profit is the final amount you keep once interest and tax are paid.

How do you find operating profit on a profit and loss statement?

Look for the line showing revenue minus cost of goods sold and operating expenses, often labelled operating profit or EBIT. It usually sits above the interest and tax lines near the bottom of the statement.