What is operating profit?

Question

Justin Parker · Accepted Answer

Operating profit, also referred to as operating income, is a financial measurement of an organization's revenue after deducting any operating costs from the organization's total revenue. Operating costs and the cost of goods sold (COGS) from an organization's total revenue determine operating profit.

Operating expenses included in calculating operating profit often include items like:

Rent
Utilities
Employee salaries and wages
Marketing costs
Any depreciation of assets

However, operating profit does not include other expenses, like interest payments or taxes. These costs are accounted for in a separate process.

Operating profit is an extremely important metric for an organization because it lets it know how cost-effective its profit generation is when all relevant operating expenses are considered. High operating profits prove that an organization can make a lot of money while keeping the costs to generate that revenue under control.

Operating profit can often be used comparatively when companies want to understand how they line up with their competitors in the same industry. It is also useful to gauge an organization's financial performance and health over time. Operating profit is often used in tandem with other key financial metrics, such as: