Close menu
Toggle menu
View Categories

What Is Operating Profit: Definition And Importance

6 min read

Table of Contents

What Is Operating Profit

What Is Operating Profit? #

Operating profit is the money your business makes from its regular work—like selling products or giving services—after you pay for things like rent, salaries, and material costs.

In simple words, it indicates how much money remains after covering all the day-to-day business costs. It does not include things like loan interest or taxes.

Some other names for operating profit are:

But don’t worry about fancy names. Just remember: it shows the real profit from your main business work.

Why Is Operating Profit Important? #

Knowing your operating profit helps you answer one crucial financial question:

“Is my business making money from its core work?”

  • Shows How Healthy Your Business Is: A substantial operating profit means your business is strong and working well. If it’s small or negative, it means you may need to make changes.
  • Helps You Make Better Decisions: When you know your real profit, you can decide better—like when to grow, when to save, or where to cut costs.
  • Attracts Investors and Bank Loans: If you’re looking for money to grow your business, investors and banks will look at your operating profit. A good number tells them you’re serious and know how to manage money.
  • Tracks Progress Over Time: Check your operating profit every month or quarter. Over time, you’ll see what’s working and what’s not. It helps you stay on the right path.
  • Improves How You Work: Keeping your operating profit high means you must run your business better. That includes saving money, being efficient, and focusing on things that bring income.

Main Parts of Operating Profit #

Total Revenue

This is all the money you earn from your main business. That includes selling products, giving services, or any work that brings in income.

Example: If you run a bakery and sell ₹10,000 worth of cakes in a month, your revenue is ₹10,000.

Cost of Goods Sold (COGS)

This is the cost of making or buying the thing you sell. It includes raw materials and labour to make your product or service.

Example: If flour, sugar, eggs, and paying your cook costs ₹4,000, your COGS is ₹4,000.

Operating Expenses

These are your regular monthly costs. Examples include:

  • Rent
  • Utilities like electricity or water
  • Staff salaries
  • Advertising expenses
  • Travel and transport

These are needed to run your business even if you don’t sell anything today.

The Simple Formula #

Here’s how you calculate operating profit step by step:

  • Add up all your business income → Total Revenue
  • Subtract the cost of goods → Gross Profit = Revenue – COGS
  • Subtract operating costs → Operating Profit = Gross Profit – Operating Expenses

Let’s look at a quick example:

  • Revenue: ₹10,000
  • COGS: ₹4,000
  • Gross Profit: ₹6,000
  • Operating Expenses: ₹3,000
  • Operating Profit: ₹3,000

So, after running the business and paying all regular bills, you earned ₹3,000 that month. That’s your real business earnings.

What Does Operating Profit Not Include? #

Operating profit does NOT include:

  • Taxes
  • Bank loan interest
  • Investments
  • Gains or losses that are not from the main business work

Why not include them? Because we only want to measure how well your daily business is doing. Financial planners should examine other expenses like taxes or loans in different steps of financial planning.

Why Should Indian Small Business Owners Care? #

  • You get clear answers while running your shop or service.
  • Helps save money in the long run.
  • Investors or banks take notice if your numbers look steady.
  • You avoid surprises at tax filing or audit time.
  • You know when to grow, hire, or slow down.

Whether you sell sarees, scrap metal, cakes, mobile plans, or run a coaching centre—operating profit gives real answers.

How To Calculate Operating Profit Step-by-Step #

  • Note Your Revenue: This includes every rupee you’ve earned from sales, services, or fees. Use a simple notebook, spreadsheet, or accounting app to track these daily.
  • Write the Cost of Goods (COGS): Track and total all monthly expenses for producing your product or service, including materials, labour, packing, and delivery.
  • Subtract COGS From Revenue: Now, reduce that total cost from your revenue. What’s left is your gross profit.
  • List All Operating Expenses: List essential running costs such as rent, bills, website, marketing, and salaries to maintain operations.
  • Subtract Operating Expenses: Reduce them from your gross profit to get your operating profit. And just like that—you now understand your real business earnings!

Common Mistakes to Avoid #

Many small business owners lose track of their profits because of simple mistakes. Here’s what you should watch out for:

  • Not writing income and expenses regularly
  • Forgetting to include hidden costs like transport
  • Counting personal spending as business costs
  • Mixing regular and one-time income sources
  • Not reviewing numbers often

Be honest and clear with your numbers. That’s the only way to grow steadily.

Best Tips To Increase Your Operating Profit #

  • Review Numbers Often: Set aside 30 minutes each week or month to check your revenue, costs, and profit. This regular habit will save you significant surprises later.
  • Cut Down Extra Expenses: Look at your spending closely. Can you shift to a smaller shop? Can you buy factory-direct materials? Small changes can grow your bottom line.
  • Increase High-Margin Services: Focus on products or services that cost less to make but earn more.
  • Train Your Staff: Teach your team to save electricity, avoid waste, and take care of inventory. Trained staff helps your business work better.
  • Use Technology: Use tools or apps to handle billing, track expenses, and stay organized. Automation saves time and avoids errors.
  • Offer Discounts Carefully: Use discounts as a way to boost traffic, not reduce profit. Give deals only when it helps you earn more overall.
  • Keep Learning: Follow blogs, attend workshops, or ask local mentors for advice. The more you know, the better you grow!

FAQ’s: #

1. How is operating profit different from net profit?

Operating profit reflects the earnings from core business activities before deducting interest and taxes, whereas net profit is what remains after all expenses, including taxes and interest, are subtracted.

2. Why is operating profit considered a more accurate measure of business performance?

It isolates the results of day-to-day operations, excluding external factors like financing or taxation, thus giving a clearer picture of how efficiently a business runs.

3. Can a company have positive revenue but negative operating profit?

Yes. If a business earns revenue but its production and operating costs are too high, it may still incur an operating loss despite making sales.

4. What happens if my operating profit keeps decreasing over time?

A declining operating profit may signal operational inefficiencies, rising costs, or reduced pricing power—prompting the need for a strategic review.

5. How does depreciation affect operating profit?

Depreciation is included in operating expenses. While it doesn’t involve cash outflow, it reduces operating profit as it represents the wear and tear of business assets over time.

Conclusion #

Operating profit is like the heart of your business.

It tells you:

  • How well you’re doing
  • If you should grow
  • When to worry
  • And where to make smart changes

Track it often. Use the right tools. And take steps to improve little by little.

Don't just learn — Start Smarter Billing Today!
Use Vyapar App to handle billing, stock & payments all in one place.
Explore Vyapar App
Running a business? Do it smartly with Vyapar.
Make bills, track stock, and handle payments in one place.
Download Vyapar Now