Operating costs are expenses associated with the maintenance and

administration of a business on a day-to-day basis. The total operating cost for a

company includes the cost of goods sold, operating expenses as well as
overhead expenses. The operating cost is deducted from revenue to arrive
at operating income and is reflected on a company’s income statement.
Businesses have to keep track of operating costs as well as the costs associated
with non-operating activities, such as interest expenses on a loan. Both costs are
accounted for differently in a company's books, allowing analysts to determine
how costs are associated with revenue-generating activities and whether or not
the business can be run more efficiently.

Generally speaking, a company’s management will seek to maximize profits for

the company. Because profits are determined both by the revenue that the
company earns and the amount the company spends in order to operate, profit
can be increased both by increasing revenue and by decreasing operating costs.
Because cutting costs generally seems like an easier and more accessible way
of increasing profits, managers will often be quick to choose this method.

However, trimming operating costs too much can reduce a company’s

productivity and, thus, its profit as well. While reducing any particular operating
cost will usually increase short-term profits, it can also hurt the company’s
earnings in the long-term. For example, if a company cuts its advertising costs its
short-term profits will likely improve, as it is spending less money on operating
costs.

However, by reducing its advertising, the company might also reduce its capacity
to generate new business and earnings in the future could suffer. Ideally,
companies look to keep operating costs as low as possible while still maintaining
the ability to increase sales.

Income is money (or some equivalent value) that an individual or business

receives in exchange for providing a good or service or through investing capital.
Income is used to fund day-to-day expenditures.
income can refer to a company's remaining revenues after paying all expenses
and taxes. In this case, income is referred to as "earnings.” Most forms of income
are subject to taxation.
Profit is a financial benefit that is realized when the amount of revenue gained
from a business activity exceeds the expenses, costs, and taxes needed to
sustain the activity. Any profit that is gained goes to the business's owners, who
may or may not decide to spend it on the business. Profit is calculated as
total revenue less total expenses.
Profit is the money a business makes after accounting for all expenses.
Regardless of whether the business is a couple of kids running a lemonade stand
or a publicly traded multinational company, consistently earning profit is every
company's goal. As a result, much of business performance is based on
profitability in its various forms.
The first level of profitability is gross profit. Gross profit is sales minus the cost of
goods sold. Sales are the first line item on the income statement, and the cost of
goods sold (COGS) is generally listed just below it. For example, if Company A
has $100,000 in sales and a COGS of $60,000, it means the gross profit is
$40,000, or $100,000 minus $60,000. Divide gross profit by sales for the gross
profit margin, which is 40%, or $40,000 divided by $100,000.

Gross Profit=Total Sales−COGs

The second level of profitability is operating profit. Operating profit is calculated
by deducting operating expenses from gross profit. Gross profit looks at
profitability after direct expenses, and operating profit looks at profitability after
operating expenses. These are things like selling, general, and administrative
costs (SG&A). If Company A has $20,000 in operating expenses, the operating
profit is $40,000 minus $20,000, equaling $20,000. Divide operating profit by
sales for the operating profit margin, which is 20%.

Operating Profit=Gross Profit−Operating Expenses

Operating Profit Margin=Operating Profit/Total Sales

The third level of profitably is net profit. Net profit is the income left over after all
expenses, including taxes and interest, have been paid. If interest is $5,000 and
taxes are another $5,000, net profit is calculated by deducting both of these from
operating profit. In the example of Company A, the answer is $20,000 minus
$10,000, which equals $10,000. Divide net profit by sales for the net profit
margin, which is 10%.

Net Profit=Operating Profit−Taxes & Interest