What is Operating Profit

The true value of a business as a going concern is measured by operating profit. That is the profit arising from its trading operations and nothing else.

Why Operating Profit is Important

Operating profit arises exclusively .from .core trading. activity - i.e. operations.

That is described as sales revenue arising solely from core trading activity less the day-to-day expenses and overheads directly associated with running the business. 

Financial Overheads

Non-interest financial fees such as bank and other service charges; for example in respect of charge card transactions or factoring, are included in operating overheads; "service" being the operative word. 

Interest charges on the other hand are excluded, as these are costs incurred in support of the company's financing activity, not its core trading.

Exceptional Profits or Charges

Apart from interest charges, other items excluded from operating profit are income from investments, interest received from company cash on deposits, taxes and profits or losses arising from the disposal of fixed assets.

Exceptional profits or losses are only applied to profit and loss once the operating profit has been struck.

To see what all of this looks like in practice, take a look at this working example of a Figurewizard profit and loss forecast.

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