What is operating profit?
Operating profit (definition)
Operating profit is the money left after paying all business costs, but before paying tax.
An operating profit shows that your business can generate more money than it spends. However you still have taxes to pay before getting to net profit (which is the money you get to keep).
Operating profit is the money you make before taxes
When calculating operating profit, your accountant makes two extra adjustments that aren’t shown in this formula. They will:
- lower your profit to account for the wear and tear on equipment; this is called depreciation and it’s done because you’ll eventually need to pay to replace that stuff
- increase your profit by removing interest payments from your costs
Interest payments are removed because operating profit is based only on things the business can control. A business doesn’t set its own interest rates, so they’re removed. For this reason, operating profit is also known as earnings before interest and tax (EBIT).