Operating Profit vs Net Profit
Net profit and operating profit are two important components in the study of accounting. Both sound very similar to each other and are, therefore, consistently confused to mean the same thing. One of the main similarities between the two is that they both appear in a firm’s financial statements and are both equally important when making business decisions. However, there are a number of differences between the two terms, how they are calculated and interpreted. The article that follows offers a clear explanation of each term and shows how net profit and operating profit and similar and different to each other.
Operating Profit
In simple terms, operating profit is the profit that a firm makes from its core/main operations. It must be kept in mind that an operating profit just as easily could be an operating loss too, depending on the kind of financial year that the firm had. A company’s operating profit is quite easy to calculate. It is calculated by subtracting the company’s total operating expenses for the year from revenue. Examples of operational expenses include, cost of goods sold, overhead costs, marketing and sales costs, advertising/product promotion costs, funds paid on legal or business consulting, research and development costs, etc.
If a company generates a sizeable operating profit, this is an indication that the firm performs its core operations efficiently and effectively. If the firm makes an operating loss, this means that the company should evaluate its core business operations and cut down wastage, cost, and improve its revenue streams. A company’s operating profit does not, however, include extraordinary expenses or income that occurs outside the normal course of business. This may be items such as the cost incurred to build a new showroom, or the income that may have been received by selling off a large building. The reason why such items are not included is that they do not occur frequently and may mislead the management, investors and shareholders with regard to the company’s future earnings prospects.
Net Profit
Net profit is the amount that is received by the company’s shareholders once all expenses and income have been accounted for. Net profit is calculated by including extraordinary expenses/income, reducing interest costs, depreciation, and taxes from operating income. This means that net profit is derived from operating profit, except for the fact that a few items that are not included in operating profit are included when arriving at the net profit.
The net profit is important for shareholders since this is the amount that is left over for distribution after all other expenses have been deducted. A company’s net profit appears in the income statement and is a good indicator of how profitable the company has been over the past year.
What is the difference between Operating Profit and Net Profit?
Net profit and operating profit are two equally important components when evaluating a company’s profitability. There are a number of differences between these two figures. Operating profit shows the profit or loss that was made in the company’s core business operations and does not include extraordinary items that do not occur in the normal course of business. Net profit, on the other hand, takes into consideration all other expenses (including extraordinary items) and arrives at the company’s overall profit. Calculating the net profit is important for investors and shareholders since this is the amount that is left for distribution once all incomes and expenses have been accounted for.
Summary:
Operating Profit vs. Net Profit
• Net profit and operating profit are two important components in the study of accounting. Both sound very similar to each other and are, therefore, consistently confused to mean the same thing.
• In simple terms, operating profit is the profit that a firm makes from its core/main operations and does not include extraordinary items that do not occur in the normal course of business, in its calculation.
• Net profit is calculated by including extraordinary expenses/income, reducing interest costs, depreciation and taxes from operating income.
• Operating profit is an indication that the firm performs its core operations efficiently and effectively, and net profit is a good indicator of how profitable the company has been over the past year.