Operating profit is one of the most important metrics for any company. In this article you will find out everything you need to know about the operating result and the various calculation options, as well as the interpretation of the key figure.
Operating Profit Definition
According to wholevehicles.com, the operating profit can be either an operating profit or an operating loss. Put simply, the operating expenses are deducted from the operating income to determine the operating result. This is done in the course of the income statement .
It is important to distinguish between company and non-company income and expenses . This decides which income and expenses are included in the calculation of the operating result.
In cost and performance accounting, the term “operating result” is defined by the difference between operating performance and costs. In this context, operating performance and costs are not to be regarded as identical with the proceeds or income or with the expenses of accounting, which is based on the HGB.
Company or external – differentiation
In concrete terms, this distinction is best explained using an example. When a computer retailer buys laptops, it affects their typical day-to-day operations, i.e. their normal business activities. However, if he assesses the profits he has made so far and buys shares that generate additional income, this income cannot be allocated to ongoing operations. It is non-company income that is not taken into account in the calculation of the operating result.
The sense and purpose of this calculation is therefore to find out which services are really directly attributable to the actual normal business activity of the company.
Calculation of the operating result
As the name suggests, the focus of the operating result is on the operational influencing factors . This means that only those figures are used that can be directly assigned to the company. External income and expenses, as well as taxes and interest, are not included in this calculation. For this reason, the operating result is also referred to as “earnings before interest and taxes” (“ EBIT ” for short ).
The simplest formula for calculating the operating profit is therefore:
Operating Income = Operating Income – Operating Expenses
However, different methods can be used to determine this, namely:
- Operating profit according to the cost of sales method
- Operating profit according to the total cost method
- Calculation by contribution margin calculation
Let’s take a closer look at these three calculation methods.
Operating profit according to the cost of sales method
The starting value for the cost of sales method is the sales for the period. Production costs, sales and administration costs and other operating costs are then deducted from this.
The result is the operating profit or operating loss for the period. In this process, all costs that can be attributed to the generated turnover were taken into account. The difference to the total cost method becomes even clearer in the direct comparison.
Operating profit according to the total cost method
With this calculation method, too, the starting value is the sales for the period. The unfinished and finished goods are then added (in the case of an increase) or deducted (in the case of a decrease) and other operating income is added.
Subsequently, the costs are now deducted, whereby the material costs, personnel costs and also the depreciation must be taken into account. In this step, the difference to the operating result according to the cost of sales method is particularly clear. For example, depreciation cannot be directly related to sales. Accordingly, they appear here in the total cost method, but not in the cost of sales method.
Contribution margin accounting and operating result
As an alternative to determining using the total cost method or the cost of sales method, the operating result can also be calculated indirectly using the contribution margin calculation. The calculation method works here in such a way that the variable costs of the items produced are deducted from the sales – this results in the contribution margin. If you then subtract the total fixed costs of the period from the contribution margin , the operating result remains.
This method is therefore quite similar to the total cost method.
Profit and Operating Income Distinction
As described, the operating result indicates which result has arisen purely from typical operational activities. Other factors are not taken into account but are very important in determining the profit or loss of the business. In particular, the interest on borrowed capital can be mentioned here , which reduces the profit. Conversely, there is also external income, for example through investments or special effects, which have a corresponding effect on the profit.
Thus, the difference between profit and operating profit is that profit includes additional values that were not included in the operating profit. However, these still have an impact on the financial success of the company, even if they did not arise directly from the operational activities.
Significance and significance of the operating result
In principle, the operating result is an important indicator. It can be determined quickly and relatively easily and offers a first impression of the result the company was able to achieve through its actual core business. At the same time, however, it is also a key figure before taxes and interest, so it does not say anything about which portion of the operating result ultimately remains in the company or is available for distributions.
The informative value decreases, especially for companies with a high debt capital ratio, because interest rates play an important role in these companies.
In summary, the operating result can be described as a relevant key figure when it comes to checking which services the company provides purely in its actual day-to-day business. However, due to the factors that are not included, the key figure should never be viewed on its own, but in combination with other values that also take interest, taxes, etc. into account, in order not to obtain a distorted overall picture of the company under consideration.