Operating profit is the profit gained solely by the operation of a business, excluding administrative, operational, commercial expenses and any other financial movements.
It’s important to emphasize that it cannot be confused with the gross profit or net profit which are steps that are determined before the operating profit.
However, in practice many business leaders forget to calculate it correctly. Want to know which errors you should avoid? Keep reading and find out.
1. Not knowing the difference between operating profit and other profits
Whether it’s through a lack of attention or knowledge, many business leaders don’t know the difference between operating profit and gross and net profits, and this can complicate the proper development of a company and hurt its finances.
So now we’ll explain the differences between these three types of profits.
1.1 Gross profit
The gross profit is the difference between your total revenues and variable costs, or in other words, it’s the profit that remains after variable costs have been excluded — values spent in the production of merchandise, which range from the raw materials to the effective sale.
Therefore it represents the result of the sale of products or services.
1.2 Net profit
Net profit takes into consideration not only variable costs but fixed costs as well.
The sum of these costs is the total cost, which will indicate the total of your business expenses.
Therefore, to define your net profit, you need to find the difference between total revenues and total costs.
1.3 Operating profit
The operating profit offers relevant information about your business’s current situation.
It is one of the pieces of data that makes up the your company’s profit and loss statement, the report that shows what your business results have been for a given period of time, which facilitates your company’s analysis.
2. Not knowing in which situations to use operating profit
Operating profit should be used so that the entrepreneur has a deeper knowledge of the real operational situation of a business, because the operating profit takes into account not only production costs, but also all costs related to the delivery of a product or a service.
In addition, it indicates your business’s potential profits, making it possible for you to attract more investors who are interested in its growth.
3. Not knowing how to calculate it
There’s no secret to calculating operating profit, the formula is as follows:
You should subtract operating expenses from the gross profit and add the result to operating revenues.
The operating expenses are those that refer to sales, operating and administrative expenses.
Operating expenses include gains that originate directly from your business’s main activity.
Through this calculation it’s possible to measure the capacity of your business to generate profits, and this is why it’s so important.
Knowing how to determine your business’s operating profit is essential to the growth of your company. This is the only way that you’ll understand the potential of your business, and be able to create strategies to increase your profitability and make it possible for your business to become a reference in your market segment.