To calculate operating profit, subtract operating expenses from gross profit. Also referred to as operating income, operating profit represents the total profits, before taxes, that a business generates from its operations. This figure helps investors, potential buyers and owners determine the overall health of a company's core business practices.
- Calculate gross profit
To calculate gross profit, subtract the cost of goods sold from the total revenue collected. Gross profit is the revenue that a company generates minus the direct amount it had to spend to manufacture or produce the service or product. This figure is important because it represents the total amount that a business earns from sales by only considering the direct amount that the company had to spend to generate that profit.
- Determine operating expenses
Unlike the cost of goods sold, operating expenses represent many of the indirect costs of doing business. Some of these expenses include employee salaries, supplies, rent and utility payments.
- Subtract operating expenses from gross profit
A company's operating profit equals its gross profit minus its operating expenses. Business owners calculate operating profit so that they realize how much profit is available to the firm before paying items such as income taxes and stock dividends.