Gross Operating Profit

Gross Operating Profit (sometimes called Gross Operating Margin) is the difference between your Sales Net Of Commissions and a sum of your COGS and other sales expenses. It shows how much money stays in the company after your pay to your suppliers of goods or all expenses required to manufacture your goods.

Obviously, your Gross Operating Profit needs to be maximized – no question about that. However, your Gross Sales (which determine your Sales Net Of Commissions) and your COGS (and your Other Sales Expenses as well), are very closely intertwined.

True, both of these categories of expenses need to be lean – both necessary and sufficient. In other words, no fat, just good lean meat. However, you must cut your expenses (which in most cases are no lean at all) very carefully - in order not to cut meat with the fat. In which case quality of your goods and services will go down, sales will fall, risks will go up and as the result, your free cash flow and your financial value will suffer.

Therefore, in order to maximize your Gross Operating Profit, you will need to optimize your COGS and your Other Sales Expenses.