Operating profit
Learn what operating profit is, how to calculate it and how to use it to judge your business's performance.
Published Wednesday 30 September 2026
Table of contents
Operating profit is the money you make before taxes
Key takeaways
- Operating profit is what your business earns from its core operations after you subtract cost of goods sold (COGS) and operating expenses such as rent and payroll
- You work it out as revenue minus COGS minus operating expenses, and it’s also known as earnings before interest and taxes (EBIT)
- Your operating profit margin shows how many cent of each euro in revenue you keep, so you can track it over time and compare it with published sector averages
- Improving operating profit usually comes down to reviewing your prices and cutting costs you don’t need
What is operating profit?
Operating profit is the money your business makes from its core operations once you’ve paid the costs of running them. It’s also called earnings before interest and taxes (EBIT).
Loan interest and income tax sit outside this figure. That lets you judge how well your day-to-day trading performs, separate from how the business is financed or taxed.
To reach operating profit, you take two types of cost away from your total revenue:
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- cost of goods sold (COGS), which covers the direct costs of making your products or delivering your services, such as materials, labour and production overheads
- operating expenses, which are the indirect costs of running the business, such as rent, utilities, marketing, insurance, depreciation and wages for non-production staff
Income or costs from investments, interest on debt and tax all stay out. What’s left shows whether your trading activity pays for itself.
Why operating profit matters for your business
Operating profit tells you whether your business model works. Revenue alone can mislead, because a business can make plenty of sales and still lose money on its operations.
A busy café, for example, can still run at a loss if rent and wages take more than the till brings in. Here are four ways operating profit helps you run your business:
- Shows whether you’re keeping costs in check against the revenue you bring in
- Points you to rising costs or weak product lines when the figure starts to fall
- Lets you compare your results with similar businesses in your sector
- Gives lenders and investors a view of whether your core business can support itself before debt and tax
Checking operating profit regularly shows you trends early, so you can adjust prices, trim spending or put more into what’s working. This guide to measuring profitability covers more ways to track the numbers.
How to calculate operating profit
Working out operating profit is simple once your financial records are organised. Follow these three steps, using figures from the same period:
- Add up your total revenue for the period, which is everything you earn from selling goods or services before any deductions.
- Subtract COGS from revenue to find your gross profit.
- Subtract your operating expenses, such as rent, marketing, administrative salaries, insurance, depreciation and amortisation, from gross profit to get operating profit.
Written as formulas, the steps look like this:
Gross profit = revenue − COGS
Operating profit = gross profit − operating expenses
You can also do the whole calculation in one line:
Operating profit = revenue − COGS − operating expenses
Both methods give the same answer. The step-by-step route shows you gross profit along the way, which is a handy checkpoint.
Operating profit example
A worked example makes the formula easier to follow. Say you own a small bakery and want to work out last month’s operating profit.
Here are your figures for the month:
- Revenue from sales: €45,000
- COGS (flour, sugar, butter, packaging and bakers’ wages): €18,000
- Rent: €3,500
- Utilities: €800
- Marketing: €1,200
- Administrative salary: €4,000
- Insurance: €500
- Equipment depreciation: €1,000
First, add up your operating expenses: €3,500 + €800 + €1,200 + €4,000 + €500 + €1,000 = €11,000. Then apply the formula:
Operating profit = €45,000 − €18,000 − €11,000 = €16,000
The bakery made €16,000 from its core operations before any loan interest or income tax. That’s the figure to use when you judge how well the business performs on its own.
Where operating profit appears on your profit and loss account
Operating profit appears as a subtotal on your profit and loss account (P&L), which is also called the income statement. As AccountingTools explains, it comes after operating and administrative expenses and before interest income, interest expense and income taxes.
Reading your P&L from top to bottom, you’ll usually see these lines in order:
- Revenue, sometimes shown as sales or turnover
- Cost of sales, which leaves you with gross profit
- Operating expenses, which leave you with operating profit
- Interest and tax, which leave you with net profit
Knowing where the line sits helps you read your financial statements and spot quickly whether your trading covers its costs.
Operating profit vs other profit types
Operating profit is one of several profit measures on your P&L, and each one looks at a different layer of costs. Comparing them shows you where money leaves the business.
Operating profit vs gross profit
Gross profit only takes COGS away from revenue. Operating profit goes further and also subtracts operating expenses, such as rent, marketing and administrative salaries.
Gross profit shows whether your prices cover production costs, while operating profit shows whether the business covers all its day-to-day running costs. You can have a healthy gross profit and a thin operating profit if overheads are high.
Your gross profit margin puts the first figure in percentage terms.
Operating profit vs net profit
Net profit is your bottom line. It subtracts everything from revenue, including COGS, operating expenses, interest and tax.
Operating profit is often more useful for judging your core business, because it sets aside your financing and tax position. Two businesses with identical operations can have very different net profits because of their debt levels and tax rates.
A related measure, net operating profit after tax (NOPAT), takes tax off operating profit while still leaving financing costs out.
Operating profit vs EBITDA
EBITDA stands for earnings before interest, taxes, depreciation and amortisation. Operating profit includes depreciation and amortisation costs, while EBITDA adds them back.
EBITDA is sometimes used to compare businesses across sectors, because it removes the effect of different depreciation methods and asset bases. For most small businesses, operating profit is the more practical measure, since it reflects the real cost of using your assets over time.
Operating profit vs cash flow
You can show an operating profit and still be short of cash. AccountingTools points out that operating profit is accrual-based, recording income and costs when they’re earned or incurred, while cash flow tracks the money that moves in and out.
Say the bakery invoices a wholesale customer in March and gets paid in May. The sale counts towards March’s operating profit, and the cash arrives two months later, so a cash flow forecast helps you see those gaps coming.
What is operating profit margin?
Operating profit margin turns operating profit into a percentage of revenue, so you can compare periods or businesses of different sizes. It shows how many cent of each euro in revenue you keep after covering operating costs.
Operating profit margin = (operating profit ÷ revenue) × 100
For the bakery, that’s (€16,000 ÷ €45,000) × 100 = 35.6%. The bakery keeps about 35.6 cent of each euro it earns after paying production and operating costs.
Margins vary a lot by sector. NYU Stern’s January 2026 data on listed European companies puts average pre-tax operating margins at about:
- 5.5% for restaurants and dining
- 4.3% for general retail
- 3.5% for grocery and food retail
- 8.6% for business and consumer services
- 19.3% for software
- 12% for the total market, excluding financial companies
These are averages for large listed companies, so margins for Irish small businesses may differ. Use them as a rough guide, and read up on profitability ratios to take your analysis further.
Tracking your own margin over time is especially useful. A falling margin can point to rising costs, pricing pressure or waste worth looking into.
What negative operating profit tells you
Negative operating profit means your core operations cost more to run than they bring in. AccountingTools notes that a business in this position usually needs extra outside funding to keep trading.
A single weak month can happen, and a run of them calls for action. These next steps help you respond:
- Review your costs line by line to find spending you can cut or delay
- Check that your prices cover your full costs, including overheads
- Speak with an accountant or adviser about what’s driving the loss
- Plan your funding early so you have cash in place while you make changes
How to improve your operating profit
Improving operating profit comes down to raising revenue, lowering costs or both. Here are steps you can take:
- Review your prices, since a 5% rise on €45,000 of monthly revenue adds €2,250 if sales hold steady
- Audit recurring costs such as subscriptions and services to find overheads you can reduce
- Negotiate with suppliers for bulk discounts or longer payment terms to lower your COGS
- Automate invoicing and bank reconciliation with accounting software to save time and reduce errors
- Drop products or services that keep producing low margins and focus on the ones that earn more
- Check your expenses every month to catch cost increases early
Small gains across a few of these areas can add up over a quarter or a year. For more ideas, see this guide on how to increase profits.
Simplify your financial reporting with Xero
Tracking operating profit is easier when your financial data is organised and up to date. Xero’s online accounting software automates bank reconciliation and keeps your invoices and expenses in one place.
With customisable financial reports, you can check your P&L anytime to see your operating profit and margin at a glance. Try Xero today and get one month free.
FAQs on operating profit
Here are answers to common questions about operating profit and how it applies to your business.
Is operating profit the same as EBIT?
Yes, operating profit and EBIT are the same figure. You’ll see either name on reports, and both measure earnings from operations before interest and income tax.
What’s excluded from operating profit?
Operating profit leaves out interest paid and received, taxes, and gains or losses from investments or asset sales. That keeps the focus on the income and costs of your core trading.
Is operating profit before or after tax?
Operating profit is calculated before tax and before interest. Tax comes off further down the P&L, on the way to net profit.
Can a business have an operating profit but a net loss?
Yes. According to AccountingTools, this happens when interest, tax or one-off losses add up to more than the operating profit.
How does operating profit differ from net operating income?
Net operating income (NOI) is mainly used in property to measure a property’s income minus operating expenses, excluding depreciation and financing costs. Operating profit applies to all types of business and includes depreciation and amortisation.
Related terms
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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.