What is operating profit?

Published Thursday 23 July 2026

Table of contents

• What is operating profit?
• Why operating profit matters for your business
• The operating profit formula
• How to calculate operating profit
• What is included in operating profit?
• Operating profit margin
• Operating profit vs other profit measures
• Tips for improving your operating profit
• Track your operating profit with Xero
• FAQs on operating profit

Key takeaways

• Operating profit is the money your business earns from its core activities after deducting the cost of goods sold (COGS) and operating expenses, but before accounting for interest and tax.
• You can calculate it using a simple formula: Revenue minus COGS minus Operating Expenses, or Gross Profit minus Operating Expenses.
• Operating profit margin shows how efficiently your business turns revenue into profit, with margins of 15% or higher often considered healthy for many industries.
• Tracking your operating profit regularly helps you spot trends, control costs, and make informed decisions about pricing, spending, and growth.

What is operating profit?

Operating profit is the amount of profit your business makes from its day-to-day trading activities, after subtracting the cost of goods sold and operating expenses from revenue. It's also known as Earnings Before Interest and Tax (EBIT), because it doesn't include interest payments or tax charges.

This figure gives you a clear picture of how well your core business operations are performing. Unlike net profit, which factors in interest and tax, operating profit focuses purely on the money coming in and going out through your regular business activities.

For small business owners, operating profit is one of the most useful numbers on your profit and loss statement. It tells you whether your business model is fundamentally sound, separate from how you've structured your finances or what tax you owe.

Why operating profit matters for your business

Understanding your operating profit helps you make better decisions about how to run and grow your business. It's a practical measure of how efficiently your operations convert revenue into profit.

Here are some of the key reasons it matters:

• It shows operational efficiency: a rising operating profit suggests your business is managing costs well relative to revenue
• It helps with pricing decisions: if your operating profit is shrinking, you may need to adjust your prices or reduce expenses
• It supports performance comparisons: you can compare your operating profit across different periods to spot trends, or benchmark against similar businesses in your industry
• It informs growth planning: a healthy operating profit gives you confidence that your business can sustain investment in new products, staff, or equipment

Lenders, investors, and potential buyers also look at operating profit when assessing your business. It gives them an objective view of your trading performance without the distortion of different tax arrangements or financing structures.

The operating profit formula

There are 2 common ways to express the operating profit formula. Both give you the same result.

The first version starts from revenue:

Operating Profit = Revenue - Cost of Goods Sold (COGS) - Operating Expenses

The second version starts from gross profit, which is revenue minus COGS:

Operating Profit = Gross Profit - Operating Expenses

Here's what each component means:

• Revenue (also called turnover): the total income your business earns from selling goods or services
• Cost of goods sold (COGS): the direct costs of producing or purchasing the goods you sell, such as raw materials, manufacturing costs, or wholesale purchase prices
• : the ongoing costs of running your business that aren't directly tied to production, such as rent, utilities, salaries, marketing, insurance, and depreciation

How to calculate operating profit

Calculating your operating profit is straightforward once you have the right figures from your accounts. Here's how to work through it step by step, using a fictional UK business as an example.

Imagine you run a small homeware shop in Bristol called Oakwood Home. In the last financial year, your figures looked like this:

• Total revenue: £320,000
• Cost of goods sold: £140,000
• Operating expenses (rent, wages, utilities, marketing, depreciation): £125,000

1. Add up your total revenue

Start with the total income your business earned from sales during the period. For Oakwood Home, that's £320,000. Make sure you're using net revenue, which excludes VAT and any refunds or returns.

2. Calculate your cost of goods sold

Work out the direct costs of the products you sold. This includes purchasing stock from suppliers, shipping to your premises, and any production costs. Oakwood Home's COGS comes to £140,000.

3. Work out your gross profit

Subtract COGS from your revenue to get your gross profit. For Oakwood Home: £320,000 - £140,000 = £180,000. This shows how much you've earned after covering the direct cost of your goods.

4. Total your operating expenses

Add up all the day-to-day costs of running your business that aren't directly linked to production. For Oakwood Home, these include £48,000 in staff wages, £36,000 in rent, £15,000 in utilities, £14,000 in marketing, and £12,000 in depreciation. That totals £125,000.

5. Calculate your operating profit

Subtract your operating expenses from your gross profit. For Oakwood Home: £180,000 - £125,000 = £55,000. That's your operating profit for the year: the amount earned purely from running the business, before interest and tax.

What is included in operating profit?

Knowing exactly what counts towards operating profit helps you interpret the figure correctly. It also makes it easier to identify which costs you can control.

Operating profit includes:

• Revenue from selling your products or services
• Cost of goods sold, including raw materials and direct production costs
• Staff salaries and wages
• Rent and business rates
• Utilities such as electricity and broadband
• Marketing and advertising costs
• Depreciation (the gradual reduction in value of assets like equipment or vehicles)
• Amortisation (the gradual write-off of intangible assets like patents or software licences)

Operating profit does not include:

• Interest payments on loans or overdrafts
• Corporation tax or income tax
• One-off gains or losses, such as selling a property or equipment
• Investment income, such as dividends or interest earned
• Foreign exchange gains or losses

By excluding these items, operating profit gives you a cleaner view of how your core business is performing. It strips out financial decisions and tax obligations that can vary significantly between businesses.

Operating profit margin

Operating profit margin tells you what percentage of your revenue is left as operating profit. It's a useful way to measure efficiency, especially when comparing performance across different periods or against businesses of different sizes.

The formula is:

Operating Profit Margin (%) = (Operating Profit / Revenue) x 100

Using the Oakwood Home example: (£55,000 / £320,000) x 100 = 17.2%. This means that for every £1 of revenue, about 17p becomes operating profit.

What counts as a healthy operating profit margin depends on your industry. Retail businesses might typically see margins of 5% to 10%, while professional services firms could achieve 20% or more. As a general benchmark, a margin of 15% or higher is often considered strong, but it's best to compare against similar businesses in your sector.

Tracking your operating profit margin over time is just as valuable as knowing the current figure. A declining margin could signal rising costs or pricing pressure, while an improving margin suggests your business is becoming more efficient.

Operating profit vs other profit measures

There are several types of profit, and each one tells you something different about your business. Understanding the distinctions helps you use the right measure for the right purpose.

Operating profit vs gross profit

Gross profit is your revenue minus the cost of goods sold. It shows how much you earn after covering your direct production costs, but before deducting operating expenses like rent, wages, and marketing.

Operating profit goes a step further by also subtracting those operating expenses. If your gross profit is healthy but your operating profit is low, it's a sign that your overhead costs may be too high relative to your sales.

Operating profit vs net profit

Net profit is the bottom line: what's left after all costs, including interest and tax, have been deducted. It's the most complete picture of your business's financial performance.

Operating profit is more useful for evaluating how well your core operations are performing. 2 businesses with the same operating profit could have very different net profits depending on their financing arrangements and tax positions.

Operating profit vs EBIT

In most cases, operating profit and EBIT are the same thing. Both represent earnings before interest and tax are deducted. The term EBIT is more commonly used in financial analysis and investor reports, while operating profit tends to appear in standard profit and loss statements.

There can be small differences in specific situations. For example, some definitions of EBIT include non-operating income like investment gains, while operating profit strictly covers income from core business activities. For most small businesses, the 2 figures will be identical.

Tips for improving your operating profit

Improving your operating profit comes down to increasing revenue, reducing costs, or ideally both. Here are some practical steps you can take.

• Review your pricing: make sure your prices reflect current costs and market conditions. Even small price adjustments can have a meaningful impact on profit margins.
• Reduce operating costs: look for savings on rent, utilities, subscriptions, and other recurring expenses. Renegotiating supplier contracts or switching providers can free up significant amounts over time.
• Improve stock management: avoid tying up cash in slow-moving inventory. Use sales data to forecast demand and order more accurately, reducing waste and storage costs.
• Renegotiate supplier terms: ask for better payment terms, bulk discounts, or early-payment discounts. Building strong relationships with key suppliers often leads to more favourable pricing.
• Use tools to improve efficiency: accounting software helps you track income and expenses in real time, so you can spot problems early and act on them. Automating invoicing, bank reconciliation, and expense tracking saves time and reduces errors.

The key is to review your operating profit regularly, not just at year end. Monthly or quarterly tracking helps you identify trends and take corrective action before small issues become bigger problems.

Track your operating profit with Xero

Keeping a close eye on your operating profit is easier when your financial data is accurate and up to date. Xero's accounting software helps you keep track of your income, expenses, and profitability, so you can make confident decisions about your business.

With customisable reports and automated bank reconciliation, you can spend less time on admin and more time acting on the numbers that matter. Get one month free.

FAQs on operating profit

Here are some frequently asked questions about operating profit.

Is operating profit the same as EBIT?

For most small businesses, yes. Both figures represent profit before interest and tax. The only difference is that some definitions of EBIT include non-operating income, while operating profit strictly covers core trading activities.

What is a good operating profit margin?

It varies by industry. Retail margins might range from 5% to 10%, while service businesses can achieve 20% or more. A margin of 15% or above is often considered healthy, but always compare against benchmarks for your specific sector.

Can operating profit be negative?

Yes. A negative operating profit, sometimes called an operating loss, means your business is spending more on production and operating costs than it earns in revenue. This can happen during startup phases, periods of heavy investment, or when sales decline unexpectedly.

Does operating profit include depreciation?

Yes, depreciation is an operating expense and is deducted when calculating operating profit. The same applies to amortisation, which covers the gradual write-off of intangible assets like software licences.

How often should you review your operating profit?

Monthly or quarterly reviews give you the most useful insights. Checking regularly helps you spot cost increases or revenue dips early, so you can adjust your strategy before they affect your bottom line.