What is Operating Profit

The value of a business as a going concern is measured by its operating profit as is its capacity to generate operating cash flows.

Why Operating Profit is Important

Because it represents the profi that has been exclusively made from the core trading operations of the business. "Exceptional items" such as profits or losses arising from external investments or the sale of fixed assets are excluded.

Calculating Operating Profit

Sales revenue arising from trading activity less the day-to-day costs of running a business describes its operating profit. Profits or losses not associated with trading, such as from investment, interest charges, taxes or the disposal of fixed assets are excluded.

What remains is the profit generated exclusively by the core trading activity (operations) of the business. This both describes the return on investment the business is capable of generating from its operations and its capacity to generate operating cash flows.

Financial Overheads

Non-interest fees such as bank and other financial service charges; for example in respect of charge card transactions or factoring, are included in operating overheads. Interest on the other hand is specifically excluded as that is concerned with external financing, not trading activity.

Operating Profit and Cash

As bank or other lender's are mostly concerned with risk, their interest in operating profit will be focused on how it contributes to operating cash flow.

The long term cash benefits of a strong operating profit will depend on the way it is to be invested. If more of it that the business can reasonably afford is channelled into assets (fixed or current) or distributed as dividends, those benefits will be cancelled out.

Allocating Operating Profits

A strong operating profit is not an end in itself therefore; the expectation must always be that next year will be even better.

Expansion always brings its own short term cash flow pressures though such as increases in accounts receivable, goods on the shelf and probably overheads, which is why any business should always first forecast how much cash that will call for before making decisions on future investments or a sustainable value for dividends.

Lockdown Recovery: Forecasting Profits, Cash and Finance. How to Apply for Business Interruption Scheme with Figurewizard How to calculate liquidity and short-term liquidity How to calculate markup and margin The Truth about Monarch Airlines Labour's Spending over 10 years from 2000 How to make profits and not run out of cash Credit Checking - How to Read Micro or Short Form Accounts Amortisation of Arrangement Fees for Long Term Loans BHS Profits Performance 2010 - 2014 BHS profits, liquidity and cash flows 2009 - 2014 How to Calculate a Free Cash Flow Forecast Campari: How to apply for a bank business loan What are Current Liabilities What are Current Assets Late Payers and Cash Flow What is Operating Cash Flow What is Working Capital How to Read a Balance Sheet Business Planning Cash Flow Calculator Short Term Liquidity Business Liquidity Corporation Tax is not Calculated on Net Profit Small Business Corporation Tax Cash Flow Calculator Using Figurewizard - VAT Using Figurewizard - Sales by Month Using Figurewizard - HP or Instalment Plan Budgets Using Figurewizard - How the budgeted cash flow forecast is calculated Using Figurewizard - Fixed Asset Budgets Using Figurewizard - Calculate Purchase of Goods Using Figurewizard - Forecasting Payments to Suppliers Using Figurewizard - How to Forecast Cash Collection Solvency and the Balance Sheet Property in the Balance Sheet Why Equity is a Liability Asset Management and Liquidity Selling Fixed Assets Contracts: Invitation to Treat What is Deferred Income Loss on the Sale of Fixed Assets Calculating Gross Profit Margin Profit and Loss Statement What is Operating Profit What is Net Operating Revenue What is Equity Profit on the Sale of Fixed Assets How Taxable Profit is Calculated What are Operating Overheads Overheads - Provisions How Depreciation is Calculated What is Business Operating Activity What are Fixed Assets Liquidity and Cash Flow Balance Sheet Liabilities and Leases Stock or Inventory Control What is Distressed Stock or Inventory What is Interest Suspense Account Product Safety Laws What is a Bill of Exchange What is Payment at Sight What is a Pro Forma Invoice What is a Bill of Lading What is a packing note What is Demurrage Cash Flow Forecasts and Planning Factoring: Invoice Discounting and Cash Flow How Does VAT Work Figurewizard as a Sales Aid for Factoring and Invoice Discounting