Operating profit (definition)
An operating profit shows that your business can generate more money than it spends. However you still have taxes to pay before getting to net profit (which is the money you get to keep).
Operating profit is the money you make before taxes
When calculating operating profit, your accountant makes two extra adjustments that aren’t shown in this formula. They will:
lower your profit to account for the wear and tear on equipment; this is called depreciation and it’s done because you’ll eventually need to pay to replace that stuff
increase your profit by removing interest payments from your costs
Interest payments are removed because operating profit is based only on things the business can control. A business doesn’t set its own interest rates, so they’re removed. For this reason, operating profit is also known as earnings before interest and tax (EBIT).
See related terms
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.
