To any company, the need to have indexes that help monitor its actions is critical. Throughout his career, the entrepreneur will have to understand them in order to find out if his measures are measures are on the right track and, mainly, to have no losses in his company’s finances.
Knowing how to properly calculate the operating profit, for example, is a very important factor and can help in this process. Therefore, in this text, we decided to present what are the main mistakes and how to calculate it correctly.
Do you want to know what you must do? Keep reading and check it out.
What is operating profit?
First of all, we need to make clear what operating profit is. It is the gain generated solely by the business’s operation, excluding the administrative, operating and commercial expenses and any other financial activities. It’s important to emphasize that it cannot be confused with gross or net profit, which are steps prior to it, even serving as the basis to calculate it.
The 3 biggest mistakes in determining the operating profit
Now that you have understood what operating profit is, let’s find out what are the main mistakes made when calculating it. Check it 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.
- Gross profit
Gross profit is the result of the subtraction of the production or operating costs from the company’s total revenue. This means that it is the profit that remains after excluding the variable costs – the amounts spent on the production of goods, ranging from raw material to the actual sale. Therefore, it will represent the result of the activity of selling products or services;
- 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.
- 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 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 what situations the operating profit should be used
This is one of the most common mistakes; the entrepreneur may even know this kind of profit exists, but has no idea what its actual purpose is, ending up missing the opportunity to improve his business’s results by using effective data that are actually related to the company.
Well, the operating profit must be used to allow the entrepreneur to have a deeper view of his company’s actual operational situation, since the operating profit does not only take into account the production costs, but all costs related to the delivery of the product or service.
In addition, it indicates the earning potential of your business, making it possible for your company to attract more investors interested in its growth.
3. Not knowing how to calculate it
Another problem that may arise is the company’s lack of knowledge of how to calculate this measure. To help you, we’ll explain how to identify the operating profit step-by-step. There is no secret to finding it; the formula is as follows:
You must subtract the gross profit from the operating expenses, and then add the result to the operating revenues. Operating costs are those related to selling, production and administrative expenses.
In turn, the revenues include the gains originated directly from your business’s main activity. By this calculation, it will be possible to measure the capacity to generate profit that your enterprise has.
With that, we conclude that the formula is operating profit = gross profit + operating revenues + operating expenses.
Let’s use a more didactic example.
Assume that the costs for manufacturing 20 products of your company are R$ 1,000.00. In a given period, you sold R$ 5,000.00 in items and R$ 50.00 were returned, plus R$ 25.00 in discounts and, in addition, you paid R$ 1,500.00 in taxes. By doing the calculations, we’ll have the following formula:
Net revenue: R$ 5,000 – R$ 50.00 – R$ 25.00 – R$ 1,500 = R$ 3,425.
Then, to calculate the gross profit, we’ll do as follow: R$ 3,425 – R$ 1,000 = R$ 2,425.
Now that we already have the gross earnings, let’s find out what the operating profit is. Here, we must add gross profit to operating revenues, which are around R$ 750.00, and then subtract operating expenses (employee payments, operating costs, rent, etc.). Let’s assume that these costs are a total of R$ 500.00.
The calculation is as follows: R$ 2,425 + R$ 750 – R$ 500 = R$ 2,675.00.
Thus, we can say that the company’s operating profit is R$ 2,675.00.
It’s now clear that the operating profit is a key measure to accurately understand your business’s potential, as well as being an important component of the Income Statement. As we’ve pointed out in previous topics, it is quite different from gross profit – another measure that takes the production or service expenses from the enterprise’s income.
In turn, operating profit informs if the company is really gaining profitability, taking into account the operating expenses. That way, with the data obtained by this calculation, it’s possible to develop more precise strategies to improve your company’s earnings, since you really know how much you are acquiring in your operations.
We hope the information contained in this text helps you to understand how to calculate the operating profit. Are you interested in getting help to improve your company’s cost and income strategies, and thus, have a good performance in relation to market challenges?
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