What Is Operating Profit?

The operating profit is a significant financial measure that reports earnings of the core business operations of a company. It gives insight into the efficient management of resources and expenditures of a business concerning its main activities. It is important to understand what is operating profit for all business owners, investors, and stakeholders since it helps to estimate the profitability of a company before taking into consideration all the non-operating income and expenses such as interest and taxes. In simple terms, operating profit meaning is referred to as operating income or operating earnings. 

Understanding the Operating Profit Formula

The operating profit formula can thus be written as: 

Operating profit = operating revenues - operating expenses 

We can expand this further and write in terms of gross profit, as below:

Operating profit = gross profit - operating expenses

Where,

• Gross profit is defined as
• Gross Profit = Revenue - Cost of Goods Sold (COGS) 

Examples of such operating costs are salaries, rent, utilities, marketing, and other operating costs required in running the business but do not directly relate to producing the product or service.

How to Calculate Operating Profit?

Let us now understand how to calculate operating profit. The basic steps involved in the calculation of operating profit are simple and can be broken down into a simple step-by-step process: 

Step 1: Calculate total revenue: Start by establishing the amount of revenue attained in terms of sales or services provided within a given time. The number represents the total income before any cost has been subtracted.

Step 2: Calculate the cost of goods sold (COGS): Identify direct costs associated with the production of goods or services sold in that given period. These include material, labour, or any other direct expenditures incurred during the production cycle.

Step 3: Calculate all operating expenses: List all indirect costs the company needs to run that are not directly related to production. These would be salaried employees, rent, utilities, marketing, and every other overhead expense.

Step 4: Plug in numbers to the equation: Operating profit = revenue - COGS - operating expenses You will end up with an actual operating profit, which is quite important in figuring out how operationally efficient your company is being.

Why is Operating Profit Important?

Let us understand why operating profit is important. 

• Measures profitability: The operating profit is the actual revenue the company earns from its core business operations. It gauges the strength of the whole financial management and profitability of the company without bringing interest and taxes into it.
• Evaluation of operational efficiency: The higher operating profit indicates a better position in the market. It is to say that this company can efficiently use its resources and ensure cost control. It also consequently shows an efficient operating profit margin and is more competitive.
• Performance analysis: The operating profit can be utilized by investors to compare various companies that operate in the same industry. In this way, the companies are able to know which ones are efficient and effective in generating the profit of their core business operation.
• Management decision: A company can make proper decisions regarding its pricing system, manage costs, and increase the level of operational efficiency through the understanding of its operating profit. It should know its source of profits and focus its efforts on areas that need improvement. 
• Investor confidence: A consistent or improving operating profit will boost investor confidence. Investors prefer firms that have good operational performance because it also comes with stability and growth more likely into the future.

How to Improve Operating Profit

Now that you know how to find operating profit, let’s understand how a company can improve it. Improving operating profit is a matter of planning and proper execution. Here are some actionable steps. 

• Reduce operation cost: You must be able to examine your spending as closely as possible and then find any location where costs can be cut without compromising quality or employee morale. You may even renegotiate with the suppliers about reducing prices or getting alternatives at a cheaper price.
• Increase sales revenue: Direct your marketing operations to activities that shall increase sales or enhance the retention rate of customers. In short, you may introduce promotions, enhance the service provided to the customer, or extend your product to serve customers better. 
• Optimise pricing strategies: Review your prices to match current market conditions while upholding maximum profits. Adopt dynamic pricing strategies that are related to demand or bundle products together at a reduced price. 
• Improve operational efficiency: Streamline processes to reduce waste and establish operational efficiencies. Adopt new technologies or methodologies through the use of lean management practices, which focus on continuous improvements.
• Invest in employee training: One can train employees for better skills and increased productivity. Trained employees are usually more efficient and result in good performance for the company as a whole. 
• Offer products based on consumer feedback: Engage with customers to gather various feedback about products and services. Gaining insight into consumer preferences will help tailor products that increase sales and reduce returns or dissatisfaction that could be a recurring problem in profits.

Differences Between Operating Profit, Net Profit, and Gross Profit

One of the ways one can make a better sense of financial statements is to understand what differentiates operating profit, net profit, and gross profit. Here is a comparison:

Explanation in Detail

Here is the detailed explanation for operating profit vs net profit and gross profit:

1. Operating Profit

• Represents whether or not a company is good or bad at performing its core business activities.
• Does not include non-operating income or expenses such as investment or interest expenses.
• Useful for examining operational effectiveness.

2. Net Profit

• Earnings generated after all costs have been subtracted, thus an entirely comprehensive view of profitability but may be distorted by one-time items that do not earn profit in the future.
• Important to understand as a whole, but is not very useful as an independent metric in operational analysis.

3. Gross Profit

• Consider only the operating profit ratio between revenue and direct production cost.
• Doesn't consider overheads or indirect costs.
• Helpful in establishing efficiency in production, yet it does not aid in profitability in general.

Conclusion
Any individual who runs a business or finances has use of operating profit. It can offer insightful information on the effectiveness with which the company has run the core activities, besides interest and taxes. A business would be able to evaluate its profitability using the accurate calculation of operating profit by following the formula and steps outlined above. The importance of operating profit allows stakeholders to make proper decisions in resource allocation and strategic planning. You can find the operating profit and other financial data with a reliable share market app to make suitable investments.