In this blog post, we delve into the calculation of operating profit, also known as EBIT (Earnings Before Interest and Taxes). Whether you have a lot of experience as an entrepreneur or are just starting to run your own business, understanding operating profit is important for measuring operational performance. In this blog post, we clearly explain how to calculate operating profit and provide practical instructions.
What is operating profit / EBIT?
Before we delve into the calculations, let’s look at the meaning of operating profit, also known as EBIT. Operating profit, or EBIT (Earnings Before Interest and Taxes), is a crucial financial indicator that reflects a company’s operational profit.
Meaning of Operating Profit (EBIT)
Operating profit or EBIT stands for profit before interest and taxes. EBIT is the abbreviation for “Earnings Before Interest and Taxes” and indicates how successful a company is in generating profit from its core activities, excluding the influence of interest and taxes. This figure is crucial for both investors and entrepreneurs, as it helps assess the financial health of a company.
How do you calculate operating profit**?**
To determine operating profit (EBIT), you simply subtract operating expenses from net revenue. Net revenue is calculated by subtracting all sales costs (such as purchase prices, returned goods, damages, payment discounts, etc.) from gross revenue.
Now you can easily use the following formula to calculate operating profit:
EBIT = net revenue – operating expenses*
- Operating expenses include all costs related to business operations, such as management, administration, and accommodation.
Simple, isn’t it?
What is the difference between EBIT and EBITDA?
EBIT (operating profit) is often associated with EBITDA or even confused with it. Let’s clarify the difference between EBIT and EBITDA.
EBITDA stands for “Earnings Before Interest, Taxes, Depreciation, and Amortisation”. The main difference between EBITDA and EBIT is that EBITDA also includes depreciation. In other words, EBITDA provides a specific view of operational results, while operating income (EBIT) focuses on a company’s core activities.
This means you can use EBIT to quickly calculate EBITDA. You just need to subtract all depreciation from your company.
3 tips to improve your online accounting process
Now that you’re familiar with operating profit (EBIT) and how to calculate it, here are some useful suggestions to optimise your online accounting process.
- Use automated registration and accounting software: Simplify your accounting process and reduce errors by implementing automated workflows. For example, link your project time tracking to your accounting software to easily handle project costs. This not only saves time but also reduces the chance of human errors.
- Keep your financial data up to date: Ensure your financial data is up-to-date by regularly updating your accounting and linking it with your external tools. For instance, you can set up automatic synchronisation to occur daily overnight in your linked tools. This way, you always have the right data and gain better insight into your financial position to make informed decisions.
- Invest in financial education: Understand the basics of accounting and finance, or consult an accountant for assistance. Financial education forms the basis for making informed decisions for your business.
Take control of your accounting with this blog on calculating operating profit or EBIT. Also, remember our tips and ensure an efficient workflow from time tracking to invoicing to minimise the risk of errors in your accounting process. Good luck!