Operating profit
Learn what operating profit is, how to calculate it and how to use it to run a more profitable business.
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 and operating expenses, before interest and tax
- Tracking your operating profit margin over time helps you spot rising costs early and make better pricing and spending decisions
- From 1 January 2027, Malaysian Financial Reporting Standard 18 (MFRS 18) requires entities reporting under it to show a defined operating profit subtotal
- You can lift operating profit by reviewing prices, trimming overheads, negotiating with suppliers and dropping products that sell poorly
What is operating profit?
Operating profit is the money your business earns from its core operations after you subtract the costs of running them. It’s also called operating income, and it’s often called earnings before interest and taxes (EBIT).
Picture a café: operating profit is what’s left from coffee and cake sales once ingredients, staff, rent and power are paid. Loan interest and income tax come off later, so this figure shows how the business itself performs, however it’s funded.
Two groups of costs come off your revenue. The first is cost of goods sold (COGS), the direct costs of making what you sell, such as materials, production labour and manufacturing overhead. The second is operating expenses, such as rent, utilities, office supplies, marketing, insurance, non-production salaries and depreciation.
Handy resources
Advisor directory
You can search for experts in our advisor directory
Financial reporting
Keep track of your performance with accounting reports
Why operating profit matters for your business
This number shows whether your business model works, because it reveals what’s left of your revenue after day-to-day costs. Tracking it helps you:
- measure how efficiently you turn sales into profit
- make confident decisions about pricing and spending
- benchmark your results against competitors and your own past performance
- show lenders and investors that your core business can support funding
It’s a core figure when you’re measuring profitability across your business.
How to calculate operating profit
You can work it out in four steps using figures from your profit and loss report. Use the same period, such as a month or a year, for every figure.
- Find your total revenue for the period.
- Add up your cost of goods sold for the same period.
- Subtract COGS from revenue to get your gross profit.
- Add up your operating expenses and subtract them from gross profit.
Written as a formula, it looks like this:
Operating profit = revenue − COGS − operating expenses
You can also split it into two lines:
Gross profit = revenue − COGS
Operating profit = gross profit − operating expenses
Leave some items out, because they don’t come from your core operations. These include:
- interest income and expense
- income tax
- investment income
- gains or losses on selling assets
For a closer look at each input, here’s a step-by-step guide to calculate operating profit.
Operating profit example
Here’s how the formula works for a small bakery over one month. The bakery brings in RM45,000 in sales, and its COGS, covering flour, sugar, butter, packaging and bakers’ wages, comes to RM18,000.
Its monthly operating expenses are:
- RM3,500 for rent
- RM800 for utilities
- RM1,200 for marketing
- RM4,000 for an admin salary
- RM500 for insurance
- RM1,000 for equipment depreciation
That’s RM11,000 in operating expenses, so the calculation is:
Operating profit = RM45,000 − RM18,000 − RM11,000 = RM16,000
The bakery’s gross profit is RM27,000, and RM16,000 of that remains once its running costs are paid.
Where operating profit appears on the income statement
Operating profit sits on your income statement as a subtotal, after operating expenses and before interest and tax. Reading down, you’ll usually see revenue, COGS, gross profit, operating expenses and then the operating subtotal.
Interest and tax come next, leading to net profit at the bottom. Lenders and investors often check the operating line in your financial statements to judge the core business.
How MFRS 18 changes operating profit reporting
The Malaysian Accounting Standards Board (MASB) has issued Malaysian Financial Reporting Standard 18 (MFRS 18) Presentation and Disclosure in Financial Statements. It replaces MFRS 101, requires defined subtotals in the statement of profit or loss and matches International Financial Reporting Standard (IFRS) 18 word for word.
According to the Malaysian Institute of Accountants (MIA), MFRS 18 applies to annual reporting periods beginning on or after 1 January 2027. Early adoption is allowed. Income and expenses go into five categories: operating, investing, financing, income taxes and discontinued operations.
Operating profit becomes the total of everything in the operating category. A separate subtotal, profit before financing and income taxes, adds investing-category items on top.
MFRS 18 applies to entities that report under MFRS, which isn’t every small business. Your accountant can confirm which standard your business follows.
Operating profit vs other profit types
Operating profit sits between gross profit and net profit, and it’s often compared with cash flow and other earnings figures. Each one answers a different question about your business.
Operating profit vs gross profit
Gross profit only subtracts COGS from revenue, while operating profit also subtracts operating expenses. A business can have a healthy gross profit but a thin operating result when its running costs are high.
Operating profit vs net profit
Net profit subtracts everything, including interest and tax, so it’s the last line of the statement. Two businesses with identical operations can report different net profits if one carries more debt. The operating figure lets you compare them on the business alone.
Operating profit vs EBITDA
EBITDA (earnings before interest, taxes, depreciation and amortisation) adds depreciation and amortisation back to operating profit. The operating figure is usually more practical for small businesses, because ovens, vans and computers wear out and replacing them is a real cost.
Operating profit vs cash flow
This figure is accrual-based, so it can differ from the cash flow moving through your bank account. AccountingTools points to unpaid customer invoices, accrued expenses and depreciation as common causes of the gap.
Say the bakery invoices a café RM5,000 for a catering order due next month. That sale lifts this month’s profit before any cash arrives.
What is operating profit margin?
Operating profit margin shows how much of each ringgit of revenue you keep after running costs. It’s a type of profit margin that makes it easy to compare periods or businesses of different sizes.
Operating profit margin = (operating profit ÷ revenue) × 100
For the bakery, (RM16,000 ÷ RM45,000) × 100 = 35.6%. That means it keeps about 35.6 sen of every ringgit it earns in sales.
Tracking the margin month by month tells you more than a single result. A falling margin can signal rising costs or pricing pressure. Pair it with other profitability ratios, such as net profit margin, for a fuller picture.
For a rough benchmark, Aswath Damodaran’s NYU Stern Margins by Sector (US) data, as of January 2026, lists pre-tax operating margins by industry. Restaurants and dining average 15.79%, general retail 6.80% and grocery and food retail 2.29%, against 12.82% for the total market.
These figures cover US publicly listed companies, so margins for Malaysian small businesses may differ.
How to improve your operating profit
Your operating profit depends mostly on four things: your prices, supplier costs, labour costs and how efficiently you work. A small shift in any of them changes your bottom line, so start with these steps:
- Review your pricing, since a 5% rise on RM45,000 of monthly revenue adds RM2,250 if sales volume holds steady
- Cut overheads you can do without, such as unused subscriptions or spare storage space
- Negotiate with suppliers for better prices or payment terms
- Automate repetitive tasks such as data entry and bank reconciliation with accounting software
- Drop products or services that sell slowly or earn thin margins
- Check your expenses every month so you can act on rising costs quickly
Every ringgit you save on running costs lifts your operating result by the same amount. For more ideas, here are further ways to increase profits.
Track your operating profit with Xero
Operating profit tells you how well your core business performs, and checking it regularly helps you act on rising costs early. Xero automates bank reconciliation and helps you manage invoices and expenses, so your numbers stay up to date.
Xero’s financial reports show your profit and loss, including the operating line, whenever you need them. Try Xero today and get one month free to see where your business stands.
FAQs on operating profit
Here are quick answers to common questions about this measure.
Is operating profit before or after tax?
It’s a before-tax figure, because income tax sits below it on the income statement. If you want an after-tax view of operating performance, look at net operating profit after tax (NOPAT).
Is operating profit the same as operating income?
Yes, they’re two names for the same figure. You might also see it labelled profit from operations, depending on who prepared the report.
Is operating profit the same as EBIT?
They’re often used interchangeably for small businesses, but they can differ. Under MFRS 18, operating profit leaves out investing-category items such as investment returns. An EBIT figure that includes them won’t match the operating line.
Can a business have a positive operating profit but a net loss?
Yes, this happens when interest, taxes or one-time losses add up to more than the operating result. A business with large loans can run profitably day to day and still report a net loss because of its interest bill.
Can operating profit be negative?
Yes, a negative result is called an operating loss, and it means your operating expenses are larger than your gross profit. Reviewing prices and your biggest running costs first usually shows where to act.
How does operating profit differ from net operating income?
Net operating income (NOI) is mainly used in real estate and excludes depreciation and financing costs. Operating profit applies to every type of business, and it deducts depreciation and amortisation.
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.