Operating Profit Definition – Formula, Example and Importance

Operating Profit definition

Operating Profit Definition, Formula & Example

Operating Profit Definition – “The sum remaining after all operating costs are subtracted from revenue”. Also known as Earning Before Interest ad Taxes (EBIT).

In simple words, operating profit is the earnings of the firm from its operations. These earnings do no include any kind of investment, interest and tax expenses. That’s why this is also known as EBIT, earnings before interest and taxes. Operating profit shows the ability of the firm to earn revenue from its operations. In addition to this, it also reflects the business actual and potential profitability excluding all the external factors.

Formula

Operating Profit = Revenues – Cost of goods sold – Operating Expenses – Depreciation

Operating Profit Example

Let’s discuss an example to understand operating profit definition in a better way. ABC Ltd is garment manufacturing company. The revenue for the financial year 2016 is Rs. 10,00,000, cost of goods sols is Rs. 3,00,000. Cost of labor and other general expenses are 2,50,000 and 60,000 respectively. Now calculate operating profit of the company.

Operating Profit = 10,00,000 – 3,00,000 – 3,10,000

= 3,90,000

Importance of Operating Profit – Why Operating Profit is Used?

Operating profit is important for not only investors or creditors but also for the organization itself. It provides the true and fair picture of the operation efficiency of the business. The higher the operating profit, the more efficient and sustainable the operational efficiency of the company.

In addition to this, operating profit also shows the competency of management. There are various factors that results in affecting it such as labor cost, pricing strategy, raw material cost, etc. In a business, all these decision depends upon the management. If operating profit is high, this means that management is efficiently managing all the operations and vice versa. So, in order to compare organisation on the basis of operating profit, compare within the same industry or sector.

Related Financial Terms of Operating Profit

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