The economic essence of profit in general lies in the difference between the cash received from sales and the costs of the enterprise, however, for different purposes of analysis, it is customary to include various costs in deductible expenses, and as a result, profit indicators characterize different profitability. For example, they distinguish:
- gross profit - the indicator reflects the amount of profit of the enterprise, if the costs were made only for cost items, that is, without taking into account selling and management expenses;
- profit from sales - the indicator takes into account the costs that were incurred in the course of selling goods or services, i.e. it already takes into account selling and administrative expenses;
- profit before tax - the indicator summarizes all the company's revenue from both main and financial activities, and reduces it by the amount of expenses for direct production, marketing, as well as other expenses;
- net profit - the indicator reflects the "dry balance" of the enterprise's activities after deducting all expenses and paying taxes to the budget.
In this article, we will dwell in more detail on operating profit and its formula.
Determination of operating profit
Business profit is often confused with revenue. The company's revenue is the sum of all proceeds from the sale of goods or services. In form 2 “Profit and Loss Statement”, revenue is reflected in the first line 2110. Profit is understood as the benefit of the enterprise from doing business, for which it is necessary to reduce revenue (the sum of all funds received) by a certain set of expenses.
If we subtract from the revenue all those expenses of the enterprise that were necessary for the production of goods or the provision of services, i.e., the cost, then the result will be gross profit. This type Profit allows you to assess whether the cost of production is acceptable to the business, whether it eats up most of the profits, but it does not give an idea of the costs incurred in connection with the sale of goods or services to end users. The analysis of these costs is especially relevant for large retailers, whose costs include commercial expenses.
Operating profit (also called profit from sales or profit from sales) reflects the profit that was received after deducting all expenses that were associated with the sale. To do this, selling and administrative expenses are deducted from gross profit, or cost, selling and administrative expenses are deducted from revenue.
Operating Profit Formula
Operating income = Revenue - Cost of sales - Selling expenses - Management expenses
Operating Profit = Gross Profit - Selling Expenses - Management Expenses
In management accounting, operating profit can be calculated on the basis of indicators of sales volume (in physical units), price, as well as the full cost of goods sold (including management and commercial expenses not a unit of finished product or service).
If these indicators are available, the profit from sales can be calculated as:
Operating profit = Volume of sales * Price - Volume of sales * Total cost of goods sold
Operating income is often confused with net income. Net profit is the final indicator of the profitability of the enterprise, cleared of all possible expenses.
For the income statement lines, the formula is calculated as:
Net income = Revenue - Cost of sales - Selling expenses - Administrative expenses - Income from participation in other organizations - Interest receivable - Interest payable - Other income - Other expenses - Current income tax - Change in deferred tax liabilities - Change in deferred tax assets - Other
Operating profit does not take into account income and expenses that are not related to the ordinary (operational) activities of the organization, as well as taxes and the cost of financing. However, it allows you to assess the degree of efficiency of the work of the main production personnel, as well as the commercial service and managers directly involved in the production process and sale of products or services. It allows you to abstract from the influence of such factors as the tax regime and interest rates on loans and borrowings, that is, the sphere of competence of financial services and company management.
Net operating income after taxes will help determine the level of efficiency of a business project. For investors and founders, this is the main indicator of the company's profitability and investment attractiveness. The management of the enterprise can influence the amount of generated profit through:
- increase in profitable operations by increasing the turnover;
- rationalization of variable costs through the introduction of innovative technologies, optimization of logistics routes;
- minimization of overhead costs.
Operating Profit: Definition
The concept of the operating type of profit is provided for identifying the results of the company's work in the main line of business. The basis for calculating this indicator is the total revenue in monetary terms received after the sale of manufactured products, resale of goods.
When operating profit is determined, the calculation formula should not take into account the sum of cash flows and investment funds. The sequence of calculations is as follows:
- the final value of the revenue is displayed;
- the indicator of gross profit is found (the sum of the cost of goods sold is deducted from the proceeds);
- how to calculate operating profit - the total gross profit is reduced by the costs incurred for the sale of consignments of goods to end consumers.
Gross profit is designed to show the degree of influence on the profitability of production of the cost of products. The operating profitability ratio provides an opportunity to make performance data more objective. The level of the tax burden and the possible actions of the fiscal authorities do not affect the value of this type of profit.
Operating profit: formula
The costs in the calculations should be accepted only in the part that relates to the sold consignment of goods. Accountable expenditure items are classified into the following categories:
- variable costs in the form of cost;
- overhead expenses aimed at paying for the rent of premises, licenses and certificates.
- Operating Profit = Revenue - Variable Costs - Overhead
Net operating income: definition and calculation
To improve the objectivity and visibility of the indicator of the financial result of activity, the operating profit amount is adjusted for the amount of tax payments made. This allows you to determine what part of the income will remain for the company to dispose of after a full range of expenses for production needs and the repayment of tax liabilities. To implement this task, net operating profit is derived, the formula for its calculation assumes a decrease in operating profit by the amount of transferred income tax.
If an investor is faced with a choice between several projects in different regions or countries, this indicator will help him determine:
- which business will be more profitable;
- in what territories are the most favorable conditions for the implementation of commercial ideas;
Reflection of profit in the reporting
Operating profit in the balance sheet - the line for this indicator is not highlighted in the report. It is easier to derive it according to the data from the income statement (financial results). To do this, use the values of the lines:
- revenue (line code 2110);
- cost of sales (data from line with code 2120);
- commercial costs (in the report, this is line 2210);
- management expenses (from the column under the code 2220).
How is operating profit calculated in management accounting - by natural meters of sales volume, current prices of commodity items and total cost. The formula for calculations is:
- Sales Volume x Price Level - Sales Volume x Cost.
Net operating income for OFR is derived by finding the difference between the values of the following lines of the report:
- 2110 (total revenue) - 2120 (cost of sales) - 2210 (commercial types of expenses incurred) - 2220 (expenses for management purposes) + 2310 (income received by the enterprise from participation in the capital of other organizations) + 2320 (interest, receivable) - 2330 (interest accrued and payable to third parties) + 2340 (other income) - 2350 (other expenses) - 2410 (profit tax amount) + (-) line 2430 + (-) line 2450 - 2460 (other).
Net operating income after tax will show, based on the results of calculations, an objective level of profitability of the project. Investors prefer to assess risks and prospects by comparing different types arrived. Operating profit is not reflected in the balance sheet, it cannot be determined on the basis of data from this report alone. The reason is that the balance sheet displays the values of the key figures for a certain date by putting the closing account balances in the lines. The statement of financial results is convenient in that it discloses the amounts accumulated over a period of time.
Operating profit margin
Determining the degree of business profitability allows you to develop an effective strategy and tactics of behavior in the market. For this purpose, you can use the value of the coefficient operating type arrived. It reflects the ratio of profit shares and sales volume. By making regular calculations, you can create an analytical table of the dynamics of the enterprise.
Operating profit margin - formula for the balance sheet and income statement:
- (Line 2300 OFR + line 2330 OFR) / line 2110 OFR x 100%.
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