Operating profit: Formula, examples, and what it shows

Operating profit shows how much money your business generates from core operations after covering day-to-day expenses. It helps you evaluate operational efficiency without the noise of taxes, interest, or one-time items.

By calculating operating profit consistently, you can better understand where costs are rising, where margins are tightening, and how sustainable your business’s underlying performance really is.

What is operating profit?

Operating profit is the profit your business earns from its core operations after subtracting operating expenses from revenue, but before interest and taxes. It shows whether your day-to-day business activities generate enough income to cover operating costs and support sustainable growth.

Operating profit is not the money you ultimately keep. Your business’s final profit is net profit, which appears on the income statement after accounting for taxes, interest, and other non-operating items. Operating profit sits above net profit and focuses specifically on operational performance.

To summarize, operating profit reflects earnings from normal business activities, excluding financing decisions and tax obligations.

Operating profit versus EBIT

Operating profit and EBIT usually refer to the same metric. Both represent earnings before interest and taxes, and most financial statements treat operating income and EBIT interchangeably.

However, subtle differences can arise based on accounting treatment. Some companies include certain non-operating items in EBIT, while others don’t. Reviewing the income statement helps clarify what’s included.

When to use each term:

• Operating profit: Use this when analyzing internal performance and operational efficiency
• EBIT: Use this when comparing companies or preparing investor-facing analysis
• Either term: Use either consistently, since consistency matters more than terminology for trend analysis

Operating profit formula

The primary operating profit formula is straightforward:

Operating profit = Revenue – COGS – Operating expenses

This formula starts with top-line revenue and subtracts all costs required to operate the business. It’s the most commonly used method and aligns with standard income statements.

There are alternative ways to calculate operating profit, depending on how you structure your financials:

Operating profit = Gross profit – Operating expenses

Operating profit = Net income + Interest + Taxes

Each variation arrives at the same result when applied consistently. The key is understanding which inputs you’re using and why.

Breakdown of operating profit components

Operating profit includes the revenues and expenses directly tied to running your core business. These components show how efficiently you generate income and control costs from day-to-day operations, without the impact of financing or taxes.

Revenue or net sales

Revenue represents the total income generated from selling goods or services during a specific period, such as monthly, quarterly, or annually. You typically report it at the top of your income statement as net sales, and it should reflect only your primary business activities.

Accurate revenue reporting matters because every operating profit calculation starts here. Overstated revenue can inflate profitability, while understated revenue can hide growth and distort trend analysis.

Cost of goods sold

Cost of goods sold (COGS) includes the direct costs associated with producing goods or delivering services. For manufacturers, this often includes raw materials, direct labor, and factory overhead. For retailers, it’s primarily inventory costs, while service businesses may have minimal or no COGS.

Because COGS sits between revenue and operating profit, changes here directly affect both gross profit and operating profit.

Operating expenses

Operating expenses cover the ongoing costs required to run the business that aren’t directly tied to production. These typically include payroll, rent, utilities, marketing, software, and administrative costs.

These expenses support operations but don’t scale directly with output. Tracking them closely is critical, since even small increases can materially reduce operating profit over time.

Components excluded from operating profit

Operating profit excludes items that don’t reflect day-to-day business operations. These exclusions help isolate how well your core activities perform without the influence of financing decisions, taxes, or irregular events.

What’s excluded from operating profit:

• Interest expense: Costs related to borrowing, which depend on financing structure rather than operations
• Income taxes: Tax obligations that vary by jurisdiction and tax strategy, not operational efficiency
• Gains or losses from asset sales: One-time results from selling property, equipment, or investments
• Investment income: Earnings from non-core investments or ownership stakes in other companies
• One-time extraordinary items: Unusual, infrequent events like restructuring costs, legal settlements, or write-offs

How to calculate operating profit: step-by-step guide

Calculating operating profit follows a clear, repeatable process. Start with your income statement and work line by line using real financial data to ensure accuracy and consistency.

This simplified example mirrors a standard income statement and shows exactly where operating profit fits.

Step 1: Identify your revenue

Start at the top of the income statement with total revenue, listed here as $1,000,000. This figure represents income from your core products or services and should exclude investment income or one-time gains.

What to include and exclude:

• Include: Core sales revenue
• Exclude: Investment income and one-time gains

Step 2: Calculate cost of goods sold

Next, subtract cost of goods sold, which totals $400,000 in this model. These are the direct costs required to produce goods or deliver services. Once you subtract COGS from revenue, you arrive at gross profit.

Common COGS components by industry include:

• Manufacturing: Raw materials, direct labor, and factory overhead
• Retail: Inventory purchase costs and freight
• Software-as-a-service (SaaS): Hosting, customer support, and third-party software costs

Step 3: Sum up operating expenses

Operating expenses in this example equal $350,000 and include payroll, rent, marketing, software, and utilities. These costs support operations but aren’t directly tied to production.

Adding them together ensures you capture the full cost of running the business.

Step 4: Apply the formula

Using the operating profit formula:

Operating profit = $1,000,000 – $400,000 – $350,000 = $250,000

This result means your operations generated $250,000 before interest and taxes. A positive figure indicates operational profitability.

Practical examples and calculations

Real-world examples make operating profit easier to understand. Different business models apply the same formula with different inputs.

Example 1: Manufacturing company

A manufacturer reports $2,000,000 in revenue. Cost of goods sold total $1,200,000, including materials and labor. Operating expenses equal $500,000.

Operating profit = $2,000,000 – $1,200,000 – $500,000 = $300,000

This result shows the company retains $300,000 from operations before financing and taxes.

Example 2: Service-based business

A consulting firm earns $800,000 in revenue with no traditional cost of goods sold. Operating expenses total $550,000.

Operating profit = $800,000 – $0 – $550,000 = $250,000

Even without COGS, the formula adapts easily. Operating profit still reflects operational efficiency.

Operating profit vs. other profit metrics

Gross profit measures production efficiency, while net profit reflects everything. Operating profit sits between them and focuses on operations alone. Together, these metrics provide a layered view of financial performance and help you choose the right lens for analysis.

• Gross profit: The amount left over from revenue after deducting manufacturing costs. It shows efficiency in production, pricing, and sales.
• Operating profit: The amount left over after deducting manufacturing and operating expenses from net sales. It’s a good measure of the financial performance and efficiency of the business.
• Net profit: The ultimate profit your business retains after deducting all expenditures, including taxes and interest. It reflects how effectively the business converts sales into final earnings.

Operating profit vs. gross profit

Gross profit equals revenue minus cost of goods sold (COGS) and focuses only on production efficiency. It does not account for operating expenses like payroll, rent, or marketing.

Gross profit = Revenue – COGS

Using the model income statement:

Gross profit = $1,000,000 – $400,000 = $600,000

This means the business retains $600,000 after covering direct production costs. Operating profit goes further by subtracting operating expenses, making it a better measure of overall operational performance.

Operating profit versus net profit

Net profit reflects your business’s final earnings after accounting for interest, taxes, and non-operating items. It shows how much profit remains available for reinvestment or distribution.

Net profit = Operating profit – Interest – Taxes

Using the model income statement:

Net profit = $250,000 – $40,000 – $60,000 = $150,000

This final figure represents the profit left after you resolve all obligations. Operating profit is better for comparing operational efficiency, while net profit is better for assessing overall profitability.

Operating profit versus EBITDA

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It adds back non-cash expenses to show earnings before accounting for asset depreciation and amortization.

EBITDA is often used to assess cash-generating ability, especially when comparing companies with different capital structures. Operating profit provides a more conservative view by including depreciation and amortization as real costs of running the business.

Use operating profit for operational analysis and margin tracking. Reserve EBITDA for valuation and cash flow comparisons.

How to calculate operating profit margin

Operating profit margin shows operating profit as a percentage of revenue, making it easier to compare operational efficiency across companies and time periods.

Operating profit margin = (Operating profit / Revenue) * 100

Margins provide useful context beyond absolute profit. A higher margin generally indicates stronger cost control and pricing power.

Consider these industry benchmark ranges for operating profit margin:

• Retail: 5–10%
• Manufacturing: 10–15%
• Software: 20–30%

Cut costs and boost profit margins with automated expense tracking and AI-powered insights

Tracking expenses manually drains time and obscures opportunities to reduce costs. Without real-time visibility into spending patterns, you're left reacting to budget overruns instead of preventing them.

Ramp's accounting automation software gives you complete control over expenses before they hit your books. Every transaction is tracked automatically, coded in real time, and matched with receipts so you can spot wasteful spending as it happens—not weeks later during reconciliation.

Here's how Ramp helps you improve operating profit:

• Real-time expense visibility: Ramp captures every transaction as it posts and surfaces spending patterns across teams, vendors, and categories so you can identify cost-saving opportunities immediately
• Automated policy enforcement: Set spending limits and approval workflows that prevent out-of-policy purchases before they happen, eliminating budget overruns and reducing manual oversight
• AI-powered duplicate detection: Ramp flags duplicate transactions and potential errors automatically, protecting you from paying twice for the same expense
• Vendor spend analysis: Track spending by vendor to negotiate better rates, consolidate suppliers, and eliminate redundant subscriptions that quietly drain your budget
• Automated receipt matching: Ramp collects and matches receipts to transactions automatically, saving 16+ hours every month and ensuring you never miss a deductible expense

When expenses are tracked automatically and coded accurately, you can focus on strategic cost reduction instead of chasing receipts and fixing errors.

Try a demo to see how Ramp helps businesses cut costs and improve operating profit.