Calculate economic profit by subtracting both explicit and implicit (opportunity) costs from revenue. Compare accounting vs economic profit and assess value creation.
Economic profit goes beyond accounting profit by including implicit costs — the opportunity costs of resources the business uses but doesn't directly pay for. While traditional accounting profit only subtracts explicit costs (rent, salaries, materials), economic profit also deducts the owner's forgone salary from alternative employment and the return that invested capital could earn elsewhere. A business can show a healthy accounting profit while actually destroying economic value.
Consider a doctor who quits a $200,000 salary to open a practice investing $500,000. If the practice earns $250,000 in accounting profit, it looks profitable. But after deducting the $200,000 forgone salary and $50,000 the capital could earn (at 10% market return), economic profit is zero. The doctor is no better off than being an employee with money in the stock market.
This calculator computes both accounting and economic profit side-by-side, quantifies your opportunity costs, and tells you whether your business is truly creating value above what your time and capital could earn elsewhere. The sensitivity table shows how different market return assumptions affect the verdict.
Accounting profit can be misleading. Economic profit tells you whether your business truly earns more than your time and capital could make elsewhere. It's the honest answer to "Am I better off running this business or working for someone else?"
This tool is designed for quick, accurate results without manual computation. Whether you are a student working through coursework, a professional verifying a result, or an educator preparing examples, accurate answers are always just a few keystrokes away.
Accounting Profit = Revenue − Explicit Costs Implicit Costs = Forgone Salary + (Capital × Market Return Rate) + Other Economic Profit = Revenue − Explicit Costs − Implicit Costs = Accounting Profit − Implicit Costs Value Creation: Economic Profit > 0 means business exceeds opportunity cost
Result: Accounting profit $150K — Economic profit $50K — creating value
Revenue $500K − explicit costs $350K = $150K accounting profit. Implicit costs: $80K forgone salary + $20K capital opportunity (10% × $200K) = $100K. Economic profit = $150K − $100K = $50K. The business earns $50K above what the owner's time and money could earn elsewhere.
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Accounting profit = Revenue − Explicit Costs (what traditional financial statements show). Economic profit = Revenue − Explicit Costs − Implicit Costs (includes opportunity costs). Economic profit is always ≤ accounting profit.
Any resource used without direct payment: owner's time (could earn salary elsewhere), invested capital (could earn market returns), use of personal property (could charge rent), and forgone benefits (health insurance, retirement matching from an employer). Understanding this concept helps you apply the calculator correctly and interpret the results with confidence.
The S&P 500 has averaged ~10% annually over the long term. For risk-adjusted comparison, use the return on an investment with similar risk to your business. Higher-risk businesses should use 12-15%. Risk-free investors might use 4-5%.
Yes, this is common for small businesses. A business with $80K accounting profit but $100K in implicit costs has -$20K economic profit. It's "profitable" on paper but the owner would be better off working elsewhere and investing their capital.
Economic Value Added (EVA) is a corporate finance metric based on the same principle: NOPAT − (Capital × WACC). It measures whether a company earns returns above its cost of capital. EVA is economic profit applied at the corporate level.
Not necessarily. Consider: Is the trend improving? Are you building equity/goodwill? Do you value non-financial benefits (flexibility, purpose)? But persistent negative economic profit means you're subsidizing the business with below-market compensation.