Operating profit
Operating profit is what your business earns from core operations before interest and tax. Learn to calculate it.
Published Monday 31 August 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 operating expenses, but before interest and tax
- It's also called operating income or earnings before interest and tax (EBIT), sitting between gross profit and net profit on your profit and loss statement
- You calculate it by subtracting operating expenses such as rent, utilities, salaries and marketing from gross profit
- It shows how well your daily operations perform on their own, apart from financing costs and tax
What is operating profit?
Operating profit is the money your business keeps from its core operations after covering operating costs, including depreciation and amortisation, but before interest and tax.
It's also called operating income. Interest and tax sit outside your daily trading, because lenders set your interest costs and the government sets your tax, so both are kept separate to show how the business itself performs.
Operating profit formula and how to calculate it
Handy resources
Advisor directory
You can search for experts in our advisor directory
How to manage your finances and cash flow
Learn about money management for your small business
Financial reporting
Keep track of your performance with accounting reports
You work out operating profit in a few short steps. In plain terms, operating profit = gross profit − operating expenses − depreciation − amortisation, where gross profit = revenue − cost of goods sold (COGS).
- Add up your total revenue for the period
- Subtract your cost of goods sold to get gross profit
- Total your operating expenses, such as rent, salaries, utilities, and marketing, including depreciation and amortisation
- Subtract operating expenses from gross profit to get operating profit
Say your business earns revenue of ₱500,000 with cost of goods sold of ₱200,000, so gross profit is ₱300,000. Take away operating expenses of ₱150,000 and you're left with an operating profit of ₱150,000.
What's included and excluded from operating profit
Operating profit counts only the income and costs tied to running your business day to day. Anything outside your core operations stays out, as the list below shows.
- Included: cost of goods sold and day-to-day operating expenses like rent, salaries, utilities, and marketing
- Included: depreciation and amortisation on assets used in operations
- Excluded: interest on debt and income tax
- Excluded: non-operating income such as asset sales, dividend and investment income, and foreign-exchange gains
- Excluded: one-off costs such as legal settlements or restructuring
A quick look at your financial statements shows exactly where each of these items appears.
Operating profit vs gross profit
Gross profit is revenue minus cost of goods sold, and nothing more. Operating profit goes further by also subtracting overheads such as rent, utilities, marketing and salaries. Gross profit tells you how profitable your products are before overheads, while operating profit shows whether the whole operation pays its way. To dig into the related measure, see how gross profit margin works.
Operating profit vs net profit
Net profit is what's left after you take operating profit and subtract interest, any other income or expense, and tax. It's the bottom line you actually keep. If your business carries debt or invests surplus cash, see how net operating profit after tax refines this picture.
Is operating profit the same as EBIT?
Usually, yes. Operating profit and earnings before interest and tax (EBIT) match when your business has no non-operating income. The difference appears when you earn money outside operations: EBIT can include that income, while operating profit doesn't.
Operating profit margin
Operating profit margin turns the figure into a percentage, so you can compare performance regardless of business size. The formula is (operating profit ÷ revenue) × 100, and it shows how much of each peso of revenue is left after operating costs. For the wider view, see how profit margin works.
Using the earlier figures, an operating profit of ₱150,000 divided by revenue of ₱500,000, times 100, gives a 30% operating profit margin.
What is a good operating profit margin?
There's no universal benchmark for a good operating profit margin. What counts as healthy depends on your industry and business model, so compare your margin against others in your sector and track your own trend over time.
For an external reference point, NYU Stern's operating and net margins by sector dataset (updated January 2026) shows how average operating margins differ across industries.
Why operating profit matters
Operating profit is a dependable read on the health of your core business, because it sets aside how you're financed and how you're taxed. That makes it easy to compare one year against the next and to catch rising costs early. For a fuller set of measures, see the guide to profitability ratios.
Track your operating profit with Xero
Keeping operating profit accurate means keeping your numbers current, and Xero does the heavy lifting. Xero accounting reports pull your revenue and expenses together automatically, so your operating profit and profit and loss statement stay up to date as you trade. You can get one month free and watch your profitability in real time.
FAQs on operating profit
These quick answers cover the questions small business owners ask most about operating profit.
How do you calculate operating profit?
Subtract operating expenses, including depreciation and amortisation, from your gross profit. Most accounting software works this out for you automatically on your profit and loss statement.
What is excluded from operating profit?
Operating profit leaves out interest and tax, along with one-off or non-operating items such as asset sales and investment income. Excluding them keeps the focus on how your everyday trading performs.
Is operating profit the same as operating income?
Yes, operating income is another name for operating profit. Some regions and accounting standards prefer one term, but both describe the same figure.
Why does operating profit matter when comparing businesses?
Because it sets aside financing and tax choices, operating profit lets you compare two businesses on the strength of their core operations alone. That makes it more revealing than net profit when debt levels or tax positions differ.
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.