Operating profit (calculation)
Operating profit is gross profit minus operating expenses and depreciation. See the formula and a worked example.
Published Monday 17 August 2026
Table of contents
How to calculate operating profit
Key takeaways
- Operating profit is what your business earns from its core operations, worked out as gross profit minus operating expenses and depreciation, before interest and tax.
- The formula is straightforward: revenue minus cost of goods sold, operating expenses and depreciation gives you operating profit.
- Operating profit margin turns that figure into a percentage of revenue, so you can compare your operational efficiency over time and against your industry.
- Because it strips out interest and tax, operating profit is closely related to earnings before interest and tax (EBIT) and shows how well the parts of the business you control are performing.
What is operating profit?
Operating profit is the money your business keeps from its everyday trading once you have covered the direct costs of what you sell and the costs of running the business. It leaves out interest on loans and tax, so it focuses on the performance you can actually control.
Think of a small café. The rent, staff wages, coffee beans and power bills all shape its operating profit, but the interest on the owner's equipment loan does not. Because interest depends on the rate your lender sets rather than how you run the business, operating profit sets it aside. For the same reason, operating profit is closely related to earnings before interest and tax (EBIT). The two are often used interchangeably, though EBIT can sometimes include income from outside your core operations, so they are not always identical.
Operating profit formula
You can calculate operating profit in one line once you know your gross profit and operating costs. Presented as a formula, it looks like this:
Operating profit = gross profit − operating expenses − depreciation
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Gross profit is your revenue minus the cost of goods sold. Operating expenses are the day-to-day costs of running the business, such as rent, utilities, salaries and marketing. Depreciation spreads the cost of assets like equipment or vehicles across their useful life and counts as an operating cost. If you would rather start from revenue, the same calculation expands to revenue minus cost of goods sold, minus operating expenses, minus depreciation.
How to calculate operating profit
Working out operating profit takes three steps, whether you pull the figures from your accounting software or a simple spreadsheet.
- Find your gross profit by subtracting the cost of goods sold from your total revenue for the period.
- Add up your operating expenses, including rent, utilities, salaries, marketing and depreciation on your assets.
- Subtract your operating expenses and depreciation from your gross profit to get your operating profit.
Here is how that works with real figures. Say your business earns $500,000 in sales, and it costs you $200,000 to provide those products or services. You then spend $150,000 on operating costs like rent, electricity and wages, plus $20,000 in depreciation on your equipment.
- Revenue: $500,000
- Cost of goods sold: $200,000, giving a gross profit of $300,000
- Operating expenses: $150,000
- Depreciation: $20,000
- Operating profit: $300,000 − $150,000 − $20,000 = $130,000
Notice that loan interest and tax do not appear anywhere in the calculation. Those come out later, when you work out your net profit. To see where each figure sits, take a look at how to read a business financial statement.
Operating profit margin
Operating profit is a dollar amount, but comparing it across periods or against other businesses is easier as a percentage. That percentage is your operating profit margin, and it shows how much of every dollar of revenue is left after covering your operating costs.
The formula is:
Operating profit margin = (operating profit ÷ revenue) × 100
Using the example above, an operating profit of $130,000 on $500,000 of revenue gives an operating margin of 26%. In other words, you keep 26 cents from every dollar of sales before interest and tax.
There is no single figure that counts as a good operating margin, because it varies widely by industry, so it makes sense to compare yours against businesses in your sector rather than a universal target. Industry data compiled by NYU Stern shows operating margins differ sharply from one sector to another. As a rough guide, a margin of 10% to 20% is often considered strong for service businesses, while retail and food businesses tend to run lower. These are US-based benchmarks, so Philippine small-business margins may differ. For a wider set of measures, the guide on profitability ratios covers margins alongside return on assets and invested capital.
Operating profit vs gross profit, net profit and EBITDA
Operating profit sits in the middle of your income statement, between gross profit at the top and net profit at the bottom. Knowing how it differs from the measures around it keeps your reporting clear.
- Gross profit is revenue minus the cost of goods sold only. It shows how profitable your products or services are before overheads, and you can read more in the guide on gross profit margin.
- Net profit is what remains after you subtract operating expenses, interest and tax. It is the bottom line, the money the business actually gets to keep.
- EBITDA is operating profit with depreciation and amortisation added back. It strips out the effect of accounting decisions on assets, which can make businesses easier to compare.
Because operating profit excludes interest and tax but still counts depreciation, it gives a clear view of how efficiently your core operations run.
Common mistakes when calculating operating profit
A few errors crop up regularly and can leave you with a figure that overstates or understates how the business is doing. Watch for these before you rely on the number.
- Including interest and tax: both belong in net profit, not operating profit, so leaving them in defeats the purpose of the measure.
- Counting one-off gains: proceeds from selling equipment or property are not part of everyday operations and should stay out of the calculation.
- Misclassifying expenses: putting a direct production cost under operating expenses (or the reverse) distorts both your gross and operating profit.
- Forgetting depreciation: skipping the depreciation on your assets inflates your operating profit and hides a real cost of running the business.
Track your operating profit with Xero
Working out operating profit once is useful, but the real value comes from watching it over time. Xero pulls your revenue and costs into a clear profit and loss report automatically, so you can see your operating profit and margin without crunching the numbers by hand. You can run financial reports whenever you need them, compare periods side by side, and share the results with your accountant. Ready to keep a closer eye on your profitability? Sign up to Xero and get one month free.
FAQs on operating profit
Here are answers to some common questions about calculating and using operating profit.
What is the operating profit formula?
Operating profit equals gross profit minus operating expenses and depreciation. Starting from revenue, it is revenue minus cost of goods sold, operating expenses and depreciation.
Is operating profit the same as EBIT?
They are closely related and often used interchangeably, since both exclude interest and tax. The difference is that EBIT can include some income from outside your core operations, while operating profit focuses only on trading activities.
What is a good operating profit margin?
It depends heavily on your industry, so the most useful comparison is against businesses of a similar type and size. Tracking whether your own margin is steady or improving over time matters more than hitting a single number.
What is the difference between operating profit and net profit?
Operating profit stops before interest and tax, so it measures core operational performance. Net profit continues on to subtract interest and tax, giving you the final amount the business keeps.
Does operating profit include depreciation?
Yes. Depreciation is treated as an operating cost, so it is subtracted when working out operating profit, which is one way operating profit differs from EBITDA.
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.