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Business Financials – How does a Profit and Loss statement work?
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Published on Thursday, 29 November 2018 09:19
It’s one of the main business reports we use, and tells us is how the business is going – it is the Profit & Loss Statement or Income Statement – so how does it work? The statement shows all the sales for a period less cost of goods (if you sell product) leaving gross profit, then from that all the expenses (operating or overheads like rent, wages, etc) leaves the operating profit (not always reported), then from that less any non-regular income and expenses, gives us the final net profit.
In summary, there are three main levels of profit or profit margins –
- Gross profit (after cost of sales deducted from sales/revenue),
- Operating profit (sometimes given = after expenses deducted) also known as Pretax profit (before tax and other non-regular items), and
- Net profit (Final, after tax and other non-regular expenses and income).
Note that “profit”, “earnings” and even “income” are all used interchangeably, and mean the same thing.
When the term "margin" is stated, it can apply to the absolute dollar number for a given profit level and/or the number as a percentage of sales/revenues.
The absolute amount, the dollar amount, is on the Profit & Loss Statement. The net profit margin commonly uses the percentage calculation to provide a measure of a company's profitability on a historical basis (3-5 years) and in comparison to peer companies and industry benchmarks. The margin is the amount of profit (at the gross, operating, pretax or net level) as a percent of the sales generated.
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