Operating Profit (EBIT)

Operating profit is the profit realized from carrying on the regular activities of a business or a company; it excludes gains and profits from other activities like property and financial investments or instruments. Operating profit is formally referred to as EBIT (Earnings before interest and tax) or operating income. Operating profit or EBIT is calculated by subtracting the cost of depreciation and amortization from EBITDA as can be seen in the diagram below.

Operating Profit or EBIT Calculation

 Fig1. Calculation of Operating Profit or EBIT. Note: Minus sign(--) in front of item represents a subtraction

Significance of Operating Profit in Operations Management

Operating profit is a very important measure for operations managers and executives as the operations of a business they manage and their decisions have a direct impact on the operating profit of a business.

As an example decision on cost, suppliers, supply chain management and quality may have both an impact on operating revenue and cost of goods sold. Decisions regarding capital expenditure both amount and timing as well as depreciation schedules can affect the depreciation and amortization charge for the business in a certain accounting period, thus affecting the operating profit. The challenge faced by operations managers is usually the one of controlling operational cost or limiting cost inflation in line with revenue increases in order to sustain or increase operating profit margins by having tight cost cotrol measure.