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Operating Profit Percentage Analysis

Simple Alliance, Kenya Limited


Definition

Your operating profit percentage is a business financial ratio that shows the returns you have derived from standard business operations. The ratio determines the level to which your business is making profits from standard business operations. While doing so, the operating profit percentage eliminates the effects of abnormal financial items as well as related all-inclusive revenues.  

Calculating the Operating Profit Percentage

The procedure for computing the operating profit percentage is rather simple. All you need are your sales figures, cost of goods sold, administrative costs, and general expenses. You then subtract your administrative costs, sales expenses, general expenses, and cost of goods sold from your sales figure.  Afterwards, divide the outcome by your sales figure.

Equation

Operating Profit Percentage = Sales – (Administrative expenses + Cost of goods sold + General expenses + Sales expenses ) /Sales

What to Exclude from the Calculation

In order to arrive at an operating profit percentage ratio that is very much related to your business’ operational outcomes, you need to omit some expense and income transactions, such as:  

  • Extraordinary expense transactions  
  • Asset dispositions
  • Interest expenses
  • Tax expenses
  • Interest income

Asset dispositions and extraordinary transactions need to be left out since they are not related to your on-going operations. Likewise, you need to leave out interest expense and income transactions because these are not related to your business’ operational attributes. Rather, the items relate to your business’ funding decisions.       

Functions

Your operating profit percentage serves several important functions, namely:

  • Showing how much profit your business is deriving from its key operations
  • Giving an exact picture of the profitability of your key business
  • Displaying instances when your business depends on actions, as opposed to operations, to create income  

The gist of the operating profit percentage ratio is pegged on the fact that your business could earn revenue from selling its assets or engaging in investing activities. These actions are usually not regular or sustainable. Maintaining steady cash flow figures is usually more sustainable.  

A Helpful Tool

To introduce efficiency and added accuracy into your operating profit percentage calculation, we have created an online automatic calculator. The tool is the below box.

Using the Operating Profit Percentage Calculator

So as to use the tool, you need some crucial financial figures. You derive these numbers from your latest income statement. The requisite numbers are:

  • Your operating income
  • Your sales figure

After obtaining the two figures, key them into their respective slots on the Operating Profit Percentage Calculator.  Click on the ‘Calculate’ button.  Your operating profit percentage figure immediately appears in its respective slot. 

Possible Scenarios

Your operating profit percentage could either:

  • Decline
  • Increase

Reducing Operating Profit Percentage

Decreases could prompt several actions, including:

  • Devising methods of reducing your operating expenses
  • Re-examining your suppliers
  • Reviewing your prices  

The operating profit percentage is a key financial ratio. It serves a number of significant purposes in your business. The ratio shows you how much profit your business is deriving from its key operations. Further, it gives you an exact picture of the profitability of your key business. The operating profit percentage also shows instances when your business depends on actions, as opposed to operations, to create income. You can use the provided operating profit percentage calculator to make your computation more efficient.

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