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Business Financials – What is a Profit and Loss Statement and what does it reveal?

images/Business Financials.JPGMany business people want to know what is a Profit and Loss Statement, and understand what does it reveal to us.

It is one of the main business reports we use, and what does reveal is how the business is going financially in a trading period  (whether you are making a profit or loss for a period) – it is also called the Profit & Loss Statement or Income Statement or Trading Statement.

The statement shows all the sales for a period less the cost of goods (if you sell product) which leaves 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.

images/bus-profit-loss-diagram.jpg

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 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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