What this calculator does
Economic profit is what is left of revenue once you subtract not just the cash you actually spent (explicit costs) but also the value of what you gave up to run the business in the first place (implicit costs, or opportunity cost). It is a broader and stricter measure than the profit figure on a set of accounts.
The confusion this trips people up on is that a business can report a healthy accounting profit while its economic profit is negative. Accounting profit only subtracts explicit costs like wages, rent and materials. It ignores what the owner's own time, savings or capital could have earned doing something else instead, such as working a salaried job or investing the money elsewhere. Economic profit puts a number on that forgone alternative and subtracts it too.
The formula
Take total revenue, subtract explicit costs (the actual cash paid out for wages, rent, materials, supplies and so on), then subtract implicit costs (the opportunity cost of resources the owner supplied themselves, such as a forgone salary from other employment, or the return that capital tied up in the business could have earned elsewhere). What remains is economic profit. Accounting profit is shown alongside it for comparison, calculated as revenue minus explicit costs only.
| Term | Meaning |
|---|---|
| Economic profit | Revenue minus explicit costs minus implicit (opportunity) costs. |
| Accounting profit | Revenue minus explicit costs only, the figure that appears on a standard profit and loss statement. |
| Explicit costs | Actual cash payments: wages, rent, materials, utilities, interest on loans. |
| Implicit costs | The opportunity cost of resources the owner already had, such as a forgone salary or the return their own capital could have earned invested elsewhere. |
| Normal profit | The point where economic profit is exactly zero: revenue exactly covers explicit and opportunity costs, with nothing left over. |
The inputs explained
| Field | What to enter |
|---|---|
| Total revenue ($) | Total revenue the business brought in over the period being assessed. |
| Explicit costs (actual cash outlays: wages, rent, materials) ($) | Every actual cash cost paid out over that period: wages, rent, materials, utilities, loan interest and similar outlays. |
| Implicit costs (opportunity cost: forgone salary, forgone return on capital tied up) ($) | The opportunity cost of resources you supplied yourself, such as the salary you could have earned elsewhere, or the return your own capital could have earned invested elsewhere instead of in this business. |
When to use it
Deciding whether to stay self-employed
A sole trader comparing their business against taking a salaried job needs to know economic profit, not accounting profit, because accounting profit does not account for the salary they are giving up by running the business instead.
Evaluating whether capital is well placed
A business owner with money tied up in equipment, stock or premises can use economic profit to check whether that capital is earning more than it would sitting in an alternative investment.
Explaining why a profitable business can still be a poor decision
A business showing solid accounting profit can still have negative economic profit if the time and capital invested would have earned more doing something else, which is a useful distinction when weighing up whether to continue.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How economic profit changes as implicit costs rise, at fixed revenue and explicit costs
The same revenue and cash costs, with a rising opportunity cost subtracted.
| Implicit costs | Economic profit | Accounting profit |
|---|---|---|
| $0 | $80,000.00 | $80,000.00 |
| $20,000 | $60,000.00 | $80,000.00 |
| $40,000 | $40,000.00 | $80,000.00 |
| $60,000 | $20,000.00 | $80,000.00 |
| $80,000 | $0.00 | $80,000.00 |
| $100,000 | −$20,000.00 | $80,000.00 |
How economic profit changes as revenue rises, at fixed costs
A fixed cost base, with revenue rising across a realistic range.
| Total revenue | Economic profit | Accounting profit |
|---|---|---|
| $150,000 | −$30,000.00 | $30,000.00 |
| $180,000 | $0.00 | $60,000.00 |
| $200,000 | $20,000.00 | $80,000.00 |
| $220,000 | $40,000.00 | $100,000.00 |
| $250,000 | $70,000.00 | $130,000.00 |
| $280,000 | $100,000.00 | $160,000.00 |
Questions
What is the difference between economic profit and accounting profit?
Accounting profit subtracts only explicit costs, the cash actually paid out. Economic profit goes further and also subtracts implicit costs, the value of opportunities given up to run the business, such as a forgone salary or the return capital could have earned elsewhere. Economic profit is always equal to or lower than accounting profit.
Can economic profit be negative while accounting profit is positive?
Yes, and this is the whole point of the measure. A business can show positive accounting profit yet have negative economic profit if the owner's time and capital would have earned more doing something else. That does not mean the business is failing in a cash sense, only that it is not the best use of those resources.
What does zero economic profit mean?
Zero economic profit is called normal profit. It means the business is earning exactly enough to cover its opportunity costs, no more and no less. In economic theory this is the point where there is no financial incentive to enter or exit the market, since resources are earning what they would earn elsewhere.
How do I estimate implicit costs for my own business?
Common starting points are the salary you would earn in a comparable job instead of running the business, and the return your invested capital could reasonably earn in an alternative investment such as an index fund or interest-bearing account. Both are estimates rather than precise figures, so it is worth trying a range of values rather than a single number.
For the closely related capital-based measure used inside larger companies, see the economic value added calculator. For a plain revenue-minus-costs figure without the opportunity-cost adjustment, use the profit calculator.