What Is Operating Profit? A Simple Guide for Business Owners

Operating profit is the amount of money your business earns from its core operations, before you account for any interest payments, tax obligations, or one-off financial events. Simply put, it's what’s left after you subtract all the regular operating expenses (like wages, rent, and stock costs) from your revenue. If you’re an Aussie business owner, this figure is a powerful indicator of how efficiently your business is running at its core. While total revenue might look impressive and net profit reflects what ends up in your pocket, operating profit tells the story of your business’s day-to-day financial performance, and whether your operations are truly sustainable.

Understanding Operating Profit in Simple Terms

Let’s break it down using a real-world analogy.

Say you run a bakery in Brisbane. Each day, customers walk in and buy fresh sourdough, lamingtons, or coffee. The total money you collect from these sales is called your revenue. But to make those items, you need to purchase flour, butter, eggs, packaging, and pay your team. You also pay rent, keep the ovens running, and market your business on social media. These are all your operating expenses. Once you subtract all those regular costs from your total revenue, the leftover amount is your operating profit.

If you made $20,000 in a month but spent $16,000 keeping things running, your operating profit is $4,000. That figure reflects how efficiently your bakery is operating before the bank takes out interest on your loan or the ATO asks for its share in tax.

Other Names for Operating Profit

Operating profit goes by a few different names. In some reports, it might be listed as:

• Operating Income
• Earnings Before Interest and Taxes (EBIT)
• Business Profit

All of these terms essentially mean the same thing: the profit your business earns from its core operations, without external or one-off influences. This consistency in definition helps accountants, investors, and even business coaches evaluate a company’s actual earning power.

Why Operating Profit Matters for Business Owners

It tells you how well your core business is performing.

You might be raking in strong sales numbers, but if your operating profit is thin or even negative, it indicates a major issue: you’re spending too much to earn that revenue. For instance, you might be overspending on labour, paying above-market rent, or experiencing shrinkage in your inventory. In some cases, blackhole expenditure—hidden or unrecoverable costs—can quietly erode your profits. Operating profit exposes the health of your internal processes, not just your ability to sell.

It supports better decision-making.

Knowing your operating profit gives you clarity when budgeting or planning for the future. Whether you're thinking about opening a second location, hiring a new staff member, or launching a new product line, having a clear view of what your operations are truly earning gives you the confidence to make smart moves—or the warning you need to scale back.

It builds trust with lenders and investors.

Operating profit is one of the first things a lender or investor looks at when evaluating your business. They want to know: Can this business generate steady profits on its own, without relying on external funding? A healthy operating profit shows that your core business activities are viable, which makes you a lower-risk borrower or a more attractive investment.

It helps you track performance over time.

By reviewing your operating profit monthly or quarterly, you’ll begin to see patterns. For example, maybe your margins improve in winter when sales spike or dip during slow months like January. These insights help you fine-tune staffing, stock levels, and marketing efforts. In the long term, this data helps shape strategic decisions and growth plans.

How to Calculate Operating Profit (with Example)

The formula is straightforward:

Operating Profit = Revenue – Operating Expenses

Let’s revisit our café example from Melbourne:

• Monthly Revenue: $40,000
• Cost of Goods Sold (COGS) (coffee beans, milk, pastries): $12,000
• Wages: $10,000
• Rent: $4,000
• Utilities: $1,000
• Marketing/Admin: $2,000

Total Operating Expenses:
$12,000 + $10,000 + $4,000 + $1,000 + $2,000 = $29,000

Operating Profit:
$40,000 - $29,000 = $11,000

That $11,000 represents the actual return your café generates from its core operations. It doesn't yet include loan interest, credit card processing fees, or tax—those will be deducted later when calculating net profit.

What’s Included and What’s Not in Operating Profit

Included in Operating Profit:

• Sales revenue from your primary business operations
• COGS (cost of raw materials, ingredients, etc.)
• Wages and salaries
• Rent, utilities, and equipment depreciation
• Admin expenses (stationery, software subscriptions, insurance)
• Marketing and advertising efforts

These are the regular, day-to-day costs that keep your business functioning. They paint a true picture of your operational health.

Excluded from Operating Profit:

• Interest on loans or lines of credit
• Tax payments (GST, income tax)
• One-off gains (like selling equipment)
• Investment income (e.g., dividends from shares)
• Legal penalties or settlements

Leaving these out allows for a cleaner evaluation of your regular business operations—no distortions from irregular events or non-core activities.

How Operating Profit Differs from Gross and Net Profit

Let’s simplify these three metrics:

• Gross Profit = Revenue - COGS
  This shows how profitable your products/services are before overheads.
   E.g., If your revenue is $10,000 and COGS is $4,000, gross profit is $6,000.
• Operating Profit = Gross Profit - Operating Expenses
  This tells you how profitable your operations are. It includes wages, rent, and utilities.
   From the above: $6,000 - $3,000 operating costs = $3,000 operating profit.
• Net Profit = Operating Profit - Interest - Taxes
  This is your bottom line after everything. It's what you take home (or reinvest).

Why it matters:
Gross profit might look healthy, but if your rent is too high or your team is overstaffed, your operating profit will shrink, long before you even pay your taxes.

How to Improve Your Operating Profit

If your operating profit isn’t where it should be, here’s how to start fixing it:

1. Cut Unnecessary Expenses

Review all your spending. Are you still paying for tools or software you no longer use? Are certain shifts overstaffed? Even reducing waste (e.g., over-ordering perishables) can tighten your margins significantly.

2. Review Your Pricing Strategy

Many small business owners undercharge out of fear. If you’re offering quality, don’t be afraid to increase prices slightly. Just be transparent and communicate the value customers get in return.

3. Negotiate With Suppliers

A quick call or email to renegotiate prices—especially if you’re a loyal or high-volume customer—can shave hundreds off your monthly expenses. Don’t be afraid to shop around.

4. Automate and Streamline

Digital tools like POS systems, inventory tracking, rostering software, or cloud accounting (like Xero) help you reduce errors, save time, and cut down on unnecessary labour costs.

5. Upskill Your Staff

Training your staff boosts productivity. Efficient team members serve more customers in less time, reduce errors, and can even increase sales through effective upselling and customer care.

Operating Profit Benchmarks in Australia

These figures vary depending on your sector, but here’s a ballpark idea for small to medium-sized businesses:

• Retail: 5%–10% is healthy
• Hospitality (cafés, restaurants): 10%–15% is solid
• Professional Services: 15%–25% is considered strong
• Trades (builders, plumbers): 10%–20% is common

If you find yourself well below these ranges, it’s worth diving into your cost structure or pricing strategy to find out why.

Why Operating Profit Can Fluctuate

Your numbers may go up and down, and that’s normal. Here’s what can impact it:

• Seasonal demand – Florists may boom in spring, while ski resorts flourish in winter. Off-seasons can naturally reduce profits.
• Cost increases – Rising prices for fuel, rent, or raw materials can eat into your margins.
• Staff changes – New employees may take time to train, reducing short-term productivity.
• Marketing pushes – Big campaigns might cost more upfront, even if they lead to long-term gain.

Tracking monthly operating profit helps you prepare for slow periods and adjust your game plan as needed.

Common Mistakes When Evaluating Operating Profit

Here are a few traps to avoid:

• Confusing revenue with profit – High sales don’t guarantee high profit. Always look at what’s left after expenses.
• Overlooking hidden costs – Small subscriptions, occasional maintenance, and supplies can add up.
• Relying on outdated data – Make sure your books are updated monthly. Using old data leads to wrong decisions.
• Ignoring the metric altogether – Don’t wait for tax season. Regularly check your operating profit to stay ahead.

Tools That Can Help You Track Operating Profit

Staying on top of your finances is easier with the right tools:

• Xero, MYOB, QuickBooks – Australian-friendly accounting software that tracks expenses and revenue in real-time.
• POS Systems – Track sales, reduce stock loss, and see what’s working in real-time. (Some even integrate directly with accounting tools.)
• Excel or Google Sheets – If you’re hands-on, set up a basic spreadsheet to track your revenue and costs weekly or monthly.

The key is consistency. Make checking your profit part of your regular routine.

Final Thoughts

Operating profit is more than just a financial metric, it’s your business’s performance report card. It helps you understand how well your business is functioning from the inside out. Whether you run a food truck in Sydney, a plumbing service in Adelaide, or an online skincare store, this number tells you if your day-to-day operations are truly profitable.

Instead of only celebrating high revenue or worrying about tax season, shift your focus to what really matters, what’s left after the work’s done. Because that’s the part that tells you whether your business is thriving or just surviving.