Operating Profit vs. Net Profit Differences
The main purpose of running any business is profit. Profit is in hand amount after paying all bills and expenses. Profits are of three types of net profit, operating profit, and gross profitGross ProfitGross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services.read more, and these bifurcations are done on the bases of the source from where the business has generated profit.
In this article, we look at the key differences between Operating Profit vs. Net Profit.
What is Operating Profit?
Operating Profit is derived from gross profit. It is the income left after paying all expenses and costs paid by the company in running the business. We can say that it remaining amount after accounting of all expenses and cost, which includes all fixed cost expenses like rent, maintenance cost, insurance cost, etc. and variable cost expenses courier, electricity bills, depreciation of the asset, etc.
Operating profit does not include profit generated by investment or interest generated on savings. Operating profit helps one to the known profit generated by operations of the company. It deals with the core of the company.
Operating profit is gross profit minus operating expenses and can be written as:-
- Operating Profit = Gross Profit – Operating Expenses
Operating profit can also be calculated as net profit minus non-operating expense minus non-operating income, and it can be expressed as:-
- Operating Profit = Net Profit – Non-operating Income – Non-operating Expenses
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What is Net Profit?
Net Profit is the total of remaining income left after accounting of all cash flowsAll Cash FlowsCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more. It can be inflow or outflow, which represent positive or negative. It is also the amount of earning left after reducing all expenses that are done by the company, interest paid by the company to the lender, and taxes. Net Profit is the profit generated from all sources after deducting all expenses.
It is used as an indicator as it indicates the ability of the company to generate from its sales. It tells about the profitability of the company, and it shows the actual profit generated by the company in a particular accounting period. It is a basic difference between total revenue and the total cost incurredCost IncurredIncurred Cost refers to an expense that a Company needs to pay in exchange for the usage of a service, product, or asset. This might include direct, indirect, production, operating, & distribution charges incurred for business operations. read more by the company in running the business.
The net profit is total revenue minus total cost which can be expressed as:-
- Net Profit = Total Revenue – Total Cost.
Net profit can be written as gross profit minus total expense for operations, interests, and tax and it can be expressed as:-
- Net Profit = Total Revenue – Total Expense for Operations, Interest, and tax.
Net profit in terms of operating profit is operating profit minus interest minus tax, and it can be written as:-
- Net Profit = Operating Profit – Interest – Tax.
Operating Profit vs. Net Profit Infographics
Here we provide you with the top 4 difference between Operating Profit vs. Net Profit.
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Source: Operating Profit vs Net Profit (wallstreetmojo.com)
Operating Profit vs. Net Profit – Key Differences
The key differences between Operating Profit vs. Net Profit are as follows –
- Operating profit is the remaining income of the company after paying off operating expenses. In contrast, Net profit is the remaining income of the company after paying all costs incurred by the company.
- Operating profit helps to know how the company is managing its resources and its expense management. In contrast, Net profit helps to know the actual profit made by the company in an accounting period.
- Operating profit help in eliminating unnecessary operating expenses, whereas Net profit help To know the profit and performance of the company in an accounting periodAccounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance.read more;
- In the case of operating profit is the profit that is generated from operational activities, whereas Net profit is the profit generated from all sources after deducting all expenses.
- Operating profit and its calculation parameters concentrate on the core operational activity of the company. In contrast, net profit and its calculation parameters concentrate on overall activity and other sources also for calculation profitability of the company.
- Operating profit tells about the profitability of a company’s operations, whereas net profit tells about the company’s abilities to generate for owners, stake owners, and shareholders.
Operating Profit vs. Net Profit Head to Head Difference
Let’s now look at the head to head difference between Operating Profit vs. Net Profit.
Similarities between Operating Profit and Net Profit
There are some similarities between operating profit and net profit, and they are as follows:-
- Operating profit and net profit are part of the income statement of a company.
- Both show the profitability of the company and provides profit generated by the company.
- Both are helpful for one reading financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more, and it provides a clear picture of the health of the company.
- Both are calculated after the deduction of various expenses of the company.
Final Thought
Profits are of three type net profits, operating profit and gross profit and these bifurcations are done on the bases of the source of from where the business has generated profit and when profit is generated from operational activities it is operating profit and when profit is for the generation of overall business it is net profit. There is the various level of profit among which the fundamental level is gross profit, the middle level of profit is operating profit and bottom, and final level of profit is net profit which actual profit of a company. Operating profit and net profit are part of the income statement of a company.
Operating profit is the remaining income of the company after paying off operating expenses, and Net profit is the remaining income of the company after paying all costs incurred by the company, which includes all expenses, tax, and interest. Both the operating profit and net profit helps one to know the profitability of the company.
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