Difference Between Operating Profit vs Net Profit
Business is always carried out with an objective of earning a profit and the same works as an incentive or as a booster to the business runner or the entrepreneur as it awards them for the resources spent and risk taken during the financial year. Profit can be broadly sliced into three parts which are gross profit, operating profit, and net profit.
In this article, we will discuss the difference between Operating Profit vs Net Profit.
Operating Profit is the profit which is earned from the regular activities of the business or of the enterprise. After arriving at the Gross Profit and from that when operating expenses (i.e. indirect expenses) like salary, rent, depreciation, insurance, telephone expenses, and electricity are subtracted from it, we get Operating Profit. This can also be termed as Earnings Before Interest and Taxes (EBIT) and this should not be any Non-Operating Income.
Net Profit is the positive value (surplus) which remains with the company or the firm after deducting or say accounting for all kind of expenses, interest, and taxes. After arriving at the Operating Profit margin figure, then one needs to deduct the interest on long-term debt and corporate taxes from it, and the resultant figure will be Net Profit. It depicts the present or the current profitability position of the firm or of the company. Along with that, it will also reflect the success and failure of the company or the entity. Net Profit can also be referred to as Earnings After Taxes (i.e. EAT). Net Profit is shown in the last or in the bottom line of the income statement.
Head To Head Comparison Between Operating Profit vs Net Profit (Infographics)
Below are the top 7 difference between Operating Profit vs Net Profit
Key Differences Between Operating Profit vs Net Profit
Both Operating Profit vs Net Profit are popular choices in the market; let us discuss some of the major Difference Between Operating Profit vs Net Profit:
- Operating Profit is the income that will remain after one deducts all the indirect expenses that are incurred to run the business from the gross profit figure and on other hands, Net Profit is the final profit figure or says it is net of all expenses, interest and the corporate taxes.
- Operating Profit depicts the operating effectiveness of the company or of the entity, but on the other side, the Net Profit figure will reveal the actual profit which is made during the financial year.
- Operating Profit will help in knowing those unnecessary expenses which can be eliminated while the Net Profit figure will provide an overview of the management of the entire current position of the company or the entity.
- EBIT (Earnings Before Interest and tax) is another term for operating profit whereas EAT (Earnings After Tax) is another term for net Profit.
Operating Profit vs Net Profit Comparison Table
Below is the 7 topmost comparison between Operating Profit vs Net Profit
|The Basis Of Comparison between Operating Profit vs Net Profit||
|Basic Definition||Operating Profit is derived from and after arriving at gross profit, operating profit will reflect the residual income which shall remain post or after accounting for all of the costs which are incurred for doing business.||Net Profit is the bottom line figure, and which shall reflect the total residual income which remains after deducting or accounting for all of the cash flows, both negative and positive.|
|Which type of expenses are included?||To calculate operating profit, one needs to deduct COGS (Cost of goods sold), fixed-cost expenses like insurance and rent, variable-cost expenses like payroll and utilities, shipping and freight, as well as depreciation and amortization of assets.||From the operating profit figure and to arrive at net profit figure, one needs to subtract all the debt expenses like interest on a loan, corporate taxes and single time entries for unusual expenses like the lawsuits or any equipment purchases. All the additional income that is earned from secondary investments or operations and any single time payments for things like the sale of assets will be added.|
|Interpretation||Operating profit is used to know how well the firm or the company or the entity is allocating its resources on the expenses.||Net Profit is used to know the actual profit made by the company or the entity in an accounting year.|
|Any other synonyms||Operating Profit can also be renowned as EBIT which stands for Earnings Before Interest and tax.||Net Profit can also be termed as EAT which stands for Earning After Tax.|
|Use||Operating Profit will be helpful and will be used to eliminate unnecessary operating expenses.||Net Profit figure will aid in knowing the performance of the entity or the company in a financial year.|
|Disadvantage||Operating Profit cannot be used to project cash flows as it does not account for capital expenditure and borrowings.||Net Profit can be window dressed as the management has the discretion to decide upon the certain type of expenses as to how much it should account for, for example, provisions.|
The two types of profit i.e Operating Profit vs Net Profit, which we have discussed, are among the three slices of the term Profit. The meaning of these two Operating Profit vs Net Profit is very clear and further, there is no contradiction in understanding these terms. At the fundamental level gross profit is the first profit figure that exists and is arrived by deducting all of the direct expenses which is followed by operating profit at the center level which is arrived by deducting all of the indirect expenses that are incurred to run the business from the gross profit figure but interest and tax have to excluded while calculating the same and finally the net profit figure which is at the bottom level and the same is the finest form of profit because it is arrived by deducting all of the expenses, corporate taxes, and interest from the operating profit and also any other non-operating income like income from sale of assets like furniture or building, or income from sale of investments will be added here to view the complete picture of the profit. The management uses all the three figures separately and all of the three figures serve a different purpose as stated earlier.
This has been a guide to the top difference between Operating Profit vs Net Profit. Here we also discuss the Operating Profit vs Net Profit key differences with infographics, and comparison table. You may also have a look at the following articles to learn more –