“Operating Profit” defined and 5 ways to improve it

Operating profit is defined as the profit generated from the normal core activities of a business. If you like, it’s the profit generated from the “bread and butter” business activities for a given business. This profit doesn’t take account of profit from investment activities or from income from other partially owned businesses.

For example, for a consulting firm, operating profit would be the profit generated from its core consulting activities and would exclude any investment gains it has made from its stock portfolio for instance.

Just like all other variations of profit, the key is to focus on the operating profit margins being achieved on the revenue being generated. Operating profit margins may be improved depending on the business by any of the following

  1. Increase your prices – the key is to at least maintain but preferably at the same time reduce the cost of service or product offering to improve the operating profit margin.
  2. Have a commission-only sales team – means reduced overhead and you pay on results
  3. Reduce unnecessary management – reduced overhead costs
  4. Have team incentives based on margins – ensures that your team is focused on what you want them to be
  5. Know your actual costs – so that you can better manage the results and seek to make savings where possible

Now the big question to answer is – Is your Business Profit–Friendly?

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