Operating profit
Learn what operating profit is, how to calculate it and how to use it to run your business better.
Published Wednesday 30 September 2026
Table of contents
Operating profit is the money you make before taxes
Key takeaways
- Operating profit shows what your business earns from its core operations before interest and tax
- The formula is revenue minus cost of goods sold minus operating expenses
- Operating profit margins vary widely by industry, so compare yours with similar businesses and your own history
- Singapore's new presentation standard requires an operating profit subtotal for annual periods beginning on or after 1 January 2027
What is operating profit?
Operating profit is the money your business makes from its core operations after you subtract cost of goods sold and operating expenses. It's also called operating income, EBIT (earnings before interest and tax) or profit from operations.
Think of a bakery: operating profit is what it earns from baking and selling bread, before loan interest and tax come out. That makes it a clear read on how well your day-to-day business runs.
Why operating profit matters for your business
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Operating profit is one of the clearest ways of measuring profitability, because it focuses on what your core business earns. Here's how it helps you run your business.
- Shows how efficiently you turn sales into profit, without the effect of loans or tax
- Guides your decisions on pricing and spending, since you can see which costs eat into profit
- Lets you compare your performance with similar businesses, whatever their debt or tax position
- Gives lenders and investors a clear view of how your core business performs
How to calculate operating profit
You can calculate operating profit with one formula or in two steps. The one-line formula uses cost of goods sold (COGS):
Operating profit = revenue − COGS − operating expenses
Revenue is your total revenue from sales. COGS is the direct cost of goods sold, such as materials and production labour. Your operating expenses are the costs of running the business, including rent, salaries, marketing and depreciation.
If you'd rather work it out in stages, follow these two steps in order.
- Subtract COGS from revenue to get your gross profit (gross profit = revenue − COGS)
- Subtract operating expenses from gross profit to get your operating profit (operating profit = gross profit − operating expenses)
Operating profit example
Say you run a neighbourhood bakery in Singapore. Last month, you made S$45,000 in sales and spent S$18,000 on ingredients and packaging.
Your operating expenses for the month came to S$11,000. That covers S$3,500 rent, S$4,000 admin salary, S$1,200 marketing, S$800 utilities, S$500 insurance and S$1,000 equipment depreciation.
Here's how the two steps work with those numbers.
- Subtract COGS from revenue to get gross profit of S$27,000 (S$45,000 − S$18,000)
- Subtract operating expenses from gross profit to get operating profit of S$16,000 (S$27,000 − S$11,000)
Your bakery earned S$16,000 from its core operations last month. Interest on any business loan and tax still come out of that amount.
Operating profit vs other profit types
Operating profit is one of several profit measures. Each one subtracts a different set of costs, so each answers a different question about your business.
Operating profit vs gross profit
Gross profit is revenue minus COGS, so it shows how much you make on the products you sell. Operating profit goes a step further and also subtracts running costs such as rent and salaries.
Operating profit vs net profit
Net profit is what's left after you subtract every cost, including interest and tax. Operating profit sits above it on your profit and loss statement, so it shows how your core business performs before financing and tax.
Operating profit vs EBITDA
EBITDA (earnings before interest, tax, depreciation and amortisation) adds depreciation and amortisation back to operating profit. For the bakery, EBITDA would be S$17,000 (S$16,000 + S$1,000 depreciation).
Operating profit vs NOPAT
Net operating profit after tax (NOPAT) estimates what your operating profit would be after tax, before financing costs. The formula is NOPAT = operating profit × (1 − tax rate).
Using Singapore's 17% corporate income tax rate as an illustration, the bakery's NOPAT would be S$13,280 (S$16,000 × 0.83). Your actual tax is charged on chargeable income after tax adjustments, so treat NOPAT as an analysis figure.
What is operating profit margin?
Operating profit margin shows how much operating profit you keep from each dollar of revenue. It's one of several profitability ratios you can use to track performance.
Operating profit margin = (operating profit ÷ revenue) × 100
For the bakery, that's (S$16,000 ÷ S$45,000) × 100 = 35.6%. In other words, it keeps about 36 cents of operating profit from every dollar of sales.
Like any profit margin, this one varies widely by industry. NYU Stern's January 2026 margins data shows average pre-tax operating margins for US listed companies.
Grocery and food retail averages about 2% (2.29%), and general retail about 7% (6.80%). Restaurants and dining average about 16% (15.79%), software about 33% (32.98%) and the total market about 13% (12.82%).
These figures cover large US listed companies, so margins for Singapore small businesses can differ. Compare your margin with similar businesses and with your own history to see where you stand.
Operating profit in Singapore financial statements
How operating profit appears in your financial statements depends on the reporting standard you follow. Singapore Financial Reporting Standards (International), or SFRS(I), mirror International Financial Reporting Standards (IFRS).
Under the current standard, SFRS(I) 1-1 (the local equivalent of IAS 1), operating profit isn't a defined subtotal. As KPMG's guide to income statement presentation explains, companies choose whether to show it and how to define it.
IFRS 18 introduces a required operating profit subtotal for annual periods beginning on or after 1 January 2027, according to the IFRS Foundation. Grant Thornton Singapore notes that Singapore adopted it as SFRS(I) 18, with the same effective date.
Until then, SFRS(I) 1-1 still applies. If your financial year starts on 1 January, your 2027 financial statements will be the first under SFRS(I) 18.
Tax comes in further down the statement, after operating profit. The Inland Revenue Authority of Singapore (IRAS) sets corporate income tax at 17% of chargeable income, which is your accounting profit after tax adjustments.
Common mistakes when calculating operating profit
Small classification errors can make your operating profit look better or worse than it is. Watch for these slip-ups when you prepare your figures.
- Including interest or tax in operating expenses, which understates your operating profit
- Leaving out depreciation and amortisation, which overstates it
- Counting one-off gains, such as money from selling equipment, as part of your core revenue
- Mixing up operating profit with net profit when you compare results or apply for finance
- Classifying the same cost differently from one period to the next, which distorts your trends
How to improve your operating profit
Operating profit rises when you earn more from each sale or spend less to run the business. These six tactics can help you increase profits from your core operations.
- Review your prices regularly, since a 5% rise on S$45,000 of monthly revenue adds S$2,250 if sales hold steady
- Cut overhead you rarely use, such as idle subscriptions or spare storage space
- Negotiate better prices or payment terms with your suppliers to lower your COGS
- Automate routine bookkeeping with accounting software to free up time for paid work
- Drop products or services that sell slowly or earn thin margins
- Check your expenses every month so you can spot rising costs early
Once you've worked through these, try a few more cost-saving ideas for small businesses.
Track your operating profit with Xero
Operating profit tells you whether your core business is paying its way. Xero brings your accounting data into easy-to-read financial reports, and automated bank feeds keep your figures up to date.
When you see your operating profit each month, you can act on pricing and costs sooner. Start tracking yours today and get one month free.
FAQs on operating profit
Here are short answers to common questions about operating profit.
Is operating profit the same as EBIT?
Usually, yes. Most businesses use the terms interchangeably, though some income statements include non-operating items in EBIT.
What's excluded from operating profit?
Operating profit leaves out interest costs and income tax, plus investment income such as dividends from shares your company holds. How one-off items, such as a gain on selling equipment, are treated depends on how your statements are set out, so check with your accountant.
What's a good operating profit margin?
It depends on your industry, so compare yourself with similar businesses and your own past results. A margin that holds steady or rises over time is a good sign your core operations are healthy.
How does operating profit differ from net operating income?
Net operating income (NOI) is a real estate measure of a property's income minus its operating expenses, while operating profit applies to any business. According to the Corporate Finance Institute, NOI leaves out financing costs and tax.
Why can net profit fall when operating profit rises?
Net profit also carries costs below the operating profit line, such as higher interest on loans, a bigger tax bill or one-off losses. If those grow faster than your operating profit, net profit can drop in a strong trading year.
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.