Items included in operating expenses are rent, salaries/wages for employees outside of production, business travel costs, property taxes, and research & development costs. Because they are fixed, they tend not to fluctuate with the sales volume. They are the costs of running the business. When operating expenses increase, the net profit of a business decreases. Operating expenses, also referred to as operating expenditures, are expenses that a business incurs for its operational activities. It includes the costs of raw materials, direct labor costs, freight-in costs, and direct factory overhead costs, such as utilities for the manufacturing site. It is subtracted from revenue to calculate gross profit. It is considered a business expense on an income statement.ĬOGS often appears as the second line item in an income statement, right after the revenue. The main expenses that factor into net profit are as follows: COGSĬOGS, also called cost of sales, refers to the direct costs incurred in producing any goods or services. Net profit reveals the success of a business and its ability to repay debt and reinvest.Ĭalculating profit on these three levels allows companies to examine which expenses take the most out of the bottom line. Operating profit reveals how efficient the company is in controlling their operating costs or other factors that could influence revenue build-ups.įinally, net profit is the amount left after all other expenses have been paid, including taxes and interest. It also subtracts depreciation and amortization of assets. Next is operating profit, which takes into account both the COGS and operating expenses such as employee payroll, rent, inventory costs, equipment, and the selling, general, and administrative costs (SG&A). There are various levels of profitability before net profit is reached.įirst is gross profit, which subtracts only the cost of goods sold (COGS) from the total revenue.īecause expenses that make up COGS, such as direct materials and direct labor, are inevitable expenses, investors consider gross profit a measure of a company’s overall ability to generate profit.

The formula for calculating net profit is: The net profit figure comprehensively displays the profitability of a business, and it is used in publicly traded companies to calculate their earnings per share (EPS). It may also be called net income or net earnings. Net profit is commonly referred to as the 'bottom line' because it appears at the bottom portion of an income statement. Net profit refers to the amount of money left after all the expenses have been subtracted from revenues.

Slack ceo questioned about net profit