Operating profit
Operating profit is what your business earns after costs but before tax. See the formula, margin, and an example.
Published Thursday 23 July 2026
Table of contents
Operating profit is the money you make before taxes
Key takeaways
- Operating profit is the money left after paying all your business costs, but before you pay tax.
- You work it out by taking your gross profit and subtracting your operating expenses.
- Operating profit is also known as earnings before interest and tax (EBIT).
- It differs from net profit, which is what's left after interest and tax come out too.
What is operating profit?
Operating profit is the money left after paying all your business costs, but before you pay tax. It shows whether your day-to-day trading brings in more than it costs to run.
A healthy operating profit means your business can generate more money than it spends. You still have tax to pay before you reach net profit, which is the money you get to keep. Operating profit is also known as earnings before interest and tax (EBIT).
Operating profit formula
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Once you know your gross profit, the operating profit formula is quick to apply. It strips out the running costs of the business so you can see what your core trading earns.
Operating profit = gross profit minus operating expenses.
2 extra adjustments sit inside this figure. Depreciation lowers your profit to account for wear and tear on equipment, because you'll eventually need to pay to replace it. Interest payments are removed because operating profit reflects only what the business controls, and you don't set your own interest rates. Your operating expenses cover the everyday costs of keeping the business running.
How to calculate operating profit: an example
A short worked example makes the formula easier to picture. Say you run a small shop in Canada over a single year.
Your revenue is $200,000 and your cost of goods sold is $80,000, so your gross profit is $120,000. Your operating expenses, covering wages, rent, and utilities, come to $70,000. Subtract $70,000 from $120,000 and your operating profit is $50,000, before any interest or tax.
What operating profit includes and excludes
Operating profit measures the costs you manage while running the business day to day. It leaves out costs that sit outside your core trading.
Operating profit includes your regular running costs, such as:
- wages and salaries
- rent and utilities
- depreciation on equipment
Operating profit excludes costs that fall outside daily trading, namely:
- interest payments
- tax
Operating profit vs gross profit vs net profit
These three measures each strip out a different set of costs, so they tell you different things. Reading them together gives you a clearer view of how your business performs.
- Gross profit is your revenue minus the cost of goods sold.
- Operating profit is your gross profit minus operating expenses, before interest and tax.
- Net profit is what's left after all expenses, interest, and tax come out.
Operating profit margin
Operating profit margin turns your operating profit into a percentage of revenue. It shows how much of each sales dollar you keep as operating profit.
Operating profit margin = (operating profit ÷ revenue) × 100, expressed as a percentage.
A healthy margin varies by industry, so it helps to compare against businesses like yours rather than a single benchmark. For more on reading this figure, see our guide to profit margin.
Track your operating profit with Xero
Keeping an eye on operating profit is easier when your income and costs sit in one place. Xero brings your finances together with real-time reporting, so you can see how your business is tracking without the manual admin.
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FAQs on operating profit
Here are answers to some frequently asked questions about operating profit.
Is operating profit the same as EBIT?
Operating profit is also known as earnings before interest and tax (EBIT), and the two are broadly the same for a small business. EBIT can sometimes include a little non-operating income, so they aren't always identical to the dollar.
What's the difference between operating profit and net profit?
Operating profit is what's left before interest and tax, while net profit is what's left after they come out. Net profit is the money you actually get to keep.
What is a good operating profit margin?
A good operating profit margin depends heavily on your industry, so there's no single figure that fits every business. Compare your margin with similar businesses to judge whether it's healthy.
Why is operating profit important?
Operating profit shows whether your core trading makes money before interest and tax cloud the picture. It helps you spot whether the everyday running of your business is sustainable.
How do you calculate operating profit margin?
Divide your operating profit by your revenue, then multiply by 100 to get a percentage. This tells you how much of each sales dollar you keep as operating profit.
Related terms
Learn more about operating profit
Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.