Profit & margins
Operating profit vs net income
Operating profit is what a business earns from its core operations: gross profit minus operating expenses. Net income (net profit) is what's left after also subtracting interest, taxes and any other non-operating items. Operating profit shows how well the store runs; net income shows what the owners keep.
Definitions
| Term | Formula | Also called |
|---|---|---|
| Gross profit | Revenue − COGS | Gross margin (as a %) |
| Operating profit | Gross profit − Operating expenses | Operating income; close to EBIT |
| Net income | Operating profit − Interest − Taxes ± Other items | Net profit, net earnings, bottom line |
The key differences:
- Gross profit vs operating profit: operating expenses such as ads, shipping, fees, apps, staff and rent.
- Operating profit vs net income: interest, taxes and anything outside normal trading, such as a one-off gain or loss.
Walking through an income statement
Worked example: one month for an online storeExample numbers
| Line | Amount | Profit level |
|---|---|---|
| Net revenue | $47,000 | |
| Cost of goods sold | −$19,000 | |
| $28,000 | Gross profit (59.6%) | |
| Ad spend, shipping, fees | −$13,600 | |
| Apps, salaries, other overheads | −$7,800 | |
| $6,600 | Operating profit (14.0%) | |
| Interest on a business loan | −$200 | |
| Income taxes | −$1,300 | |
| $5,100 | Net income (10.9%) |
The calculator gives profit before tax and interest: effectively operating profit, if you include all your overheads in "other costs".
Operating profit vs net income: why the difference matters
Operating profit isolates the business itself. Two stores with identical sales and costs, one funded by a loan and one by the owner's savings, have the same operating profit but different net income. If you want to know whether the store's products, pricing and marketing work, look at operating profit.
Net income is what you can actually take out or reinvest. Interest and taxes are real costs. A store with a large loan can have a healthy operating profit and very little net income.
Want this tracked automatically, every day?See which Google Ads campaigns actually make money, measured on real profit (POAS), not just revenue.Try Selvra OSImproving each level
| Level | Main levers |
|---|---|
| Gross profit | Prices, discounts, supplier and freight costs, product mix |
| Operating profit | Ad efficiency, shipping costs, app and staff costs |
| Net income | Interest rates and debt levels, tax planning (with an accountant) |
The guides to the operating profit formula and the net profit formula go deeper on each. For the full statement, see what a P&L is.
FAQ
Is net income the same as net profit?
Yes. Net income, net profit, net earnings and the bottom line all mean the same thing: what's left after every expense, interest and tax.
What's the difference between operating profit and gross profit?
Gross profit only subtracts the cost of the goods sold. Operating profit also subtracts operating expenses: ads, shipping, payment fees, apps, staff and rent.
Can net income be higher than operating profit?
It can, if the business has non-operating income larger than its interest and taxes, such as a one-off gain from selling an asset. For most small online stores, net income is lower.
Which one do lenders and investors look at?
Both. Operating profit shows how well the core business performs; net income shows what's left for the owners after financing costs and taxes.