Operating Profit vs Net Profit: Key Differences

A business thrives on the profit it makes, and this profit entirely depends on its growth and ability to manage market demand. Without any profit, a business simply fails to revive and lose the motivation to continue sailing further in a vast ocean of commerce. While a business can at its best, float in the absence of profit through debt financing or crowdfunding, it can be hardly acknowledged as a long-term strategy. Almost every business tries to cross the mark where it is not only making a consistent revenue but also earning profit. Profit is the incentive for which investors and business owners take collective risks and invest their wealth. In this blog, we are going to learn in detail about operating profit vs net profit. While these two terms may seem similar, in commercial glossary, they carry large differences.

What is Operating Profit?

Concepts such as operating profit are crucial to understanding operating profit vs net profit notion.

Calculation of Operating Profit

Calculation of operating profit is easier with an example. Let’s first review the formula:

Formula

Operating Profit = Revenue - Cost of Goods Sold (COGS) - Operating Expenses Here, Revenue is the net income from sales of goods and services COGS is all direct expenses for manufacturing the goods Operating Expenses include expenses for daily business management

Example of Operating Profit

Let’s assume a hypothetical case scenario. A firm, AVN Internationals had recorded a revenue of ₹5,00,000, while its other expenses are:

Cost of Goods Sold (COGS) = Cost of raw materials + Overhead expenses + Factory rent + Cost of packaging + Electricity expenses + Labour wages = 30,000 + 5,000 + 3,000 + 4,000 + 20,000 + 1,50,000 = ₹2,12,000

Operating Expenses = Sales cost + Marketing cost + Administrative expense = 1,00,000 + 40,000 + 60,000 = ₹2,00,000

Operating Profit of AVN International = Revenue - COGS - Operating Expenses = 5,00,000 - 2,12,000 - 2,00,000 = ₹88,000

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Importance of Operating Profit

• Operating profit determines and signals the efficiency of the business. Any change in the operating profit indicates the way a small business or a startup is handling its core business.
• Firms get a fair idea about managing their expenses by knowing the operating profit. An operating profit measures the cost of goods sold and expenses such as administrative costs, which practically helps the firm to ideate its sales funnel and minimization of cost.
• Operating profit helps investors take a step towards investing in a company as they can easily understand the ability of the company to meet its day-to-day expenses.
• Firms can budget and set aside contingent funds by taking a look at its operating profit. By looking at the operating profit, firms can easily trim down the rising expenses.

What is Net Profit?

When discussing the difference between operating profit and net profit, it is important to keep in mind that the consequential impact of net profit is more than operating profit. If a firm has to reflect and look back at its balance sheet, it must first understand how much profit it is actually earning. Net profit gives a true snapshot of the profit a firm is left with after paying off all its debts and expenses.

Also read the main difference between gross profit and net profit.

Calculation of Net Profit

Here is a quick reference to how net profit is calculated.

Formula

Net Profit = Revenue - Cost of Goods Sold (COGS) - Operating Expenses - Interest Expense - Taxes

Example of Net Profit

As we explained the concept of operating profit with an example, here is another example to illustrate net profit better. Bernkey & Cakes made a total ₹8,00,000 in revenue for the financial year ended 31st March 2024. Here is a list of all the expenses incurred by the firm during this time:

Operating Expenses = Sales cost + Marketing cost + Administrative expense + Depreciation + Utility expenses = 2,00,000 + 1,20,000 + 40,000 + 10,000 + 5,000 = ₹3,75,000

Taxes = GST + Income Tax + Corporate Tax = 1,00,000 + 1,25,000 + 70,000 = ₹2,95,000

Operating Profit of Bernkey & Cakes = Revenue - Cost of Goods Sold (COGS) - Operating Expenses - Taxes = 8,00,000 - 50,000 - 3,75,000 - 2,95,000 = ₹80,000

Key Differences Between Operating Profit and Net Profit

Net profit and operating profit have parallels, but are still two different concepts. Here is operating profit vs net profit explained in a neat way.

Conclusion

This blog about operating profit vs net profit mainly discusses the critical points with examples. While operating profit gives SMEs and startups a memo of how the daily expenses are being managed, net profit informs a firm of its actual profit after payment of all taxes. If you are considering scanning the financial health of your firm, you may have to examine both of these concepts. Operating profit is required for taking daily business decisions, and net profit helps in the form of taking long-term decisions. These key indicators are the barometers of a business, as they help a business move forward with informed decisions.

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