Operating profit is what a business earns from running its core operations, after deducting operating expenses from gross profit but before financing costs and tax. It is widely called EBIT, which stands for earnings before interest and tax.
What it means
Operating profit takes gross profit and subtracts the overheads of running the business - admin salaries, rent, utilities, marketing, depreciation. The result measures how profitable the operations themselves are, independent of how the business is financed (interest) or taxed. That makes it a cleaner comparison of operating performance between businesses.
Where it fits in
Most of the payroll bill that is not direct production labour - management, admin and support salaries plus employer contributions - is an operating expense that reduces operating profit. It is the line where the bulk of the staff cost lands.
Key rules
- Operating profit equals gross profit less operating expenses.
- Also known as EBIT - earnings before interest and tax.
- Excludes financing costs and tax to isolate operating performance.
- Overhead payroll cost is an operating expense reducing it.
