And here she is, the accountant that refers to the previous answer.I will take you step by step from turnover to what is left under the line and everything in between. A long story, but all the dry enumerations can easily be found elsewhere. My goal is to bring the notions to life a little.
As an example I take the fictional fruit juice-bars “the juicy Citrus” which has a good first year in an attractive kiosk at the Central station of Grapestad and just from the Administration Office an overview of the profit and Loss account.With a freshly squeezed glass of orange juice at hand we start.
Turnover +/+ 140,000 euro
“The juicy Citrus” sells its glass fruit juice for 5.45 euros apiece.The SAP is taxed with 9% VAT. The VAT is transferred to the tax authorities on a monthly and no turnover. When processing the sales, the accountant counts 5 euros in turnover and 0.45 euro is set aside as debt to the tax authorities.
A turnover of 140,000 euros means 28,000 glasses of juice sold (140,000:5) or some 108 glasses per day (they are open 5 days a week).
Purchase cost-/-70,000 euro
The purchasing costs are mainly oranges (6 per glass, total 1.80 euro) and the paper Cup, a small napkin and the bamboo straw, all printed with the logo of “The Juicy Citrus” (0.70 Euro).Together 2.50 Euro per glass, multiplied by 28,000 glasses delivers the direct purchase costs.
What is meant by direct purchasing costs?If you only sell one product, you might be inclined to wipe all costs in one hope, for example, also advertising costs. Imagine selling other than orange juice also chocolate milk. Then it probably becomes clearer.
For chocolate milk You buy very different ingredients, and you do not need any straws for this, but a spoon.However, the advertisements you make for your shop are for both products. To decide whether you can better expand with apple juice or with coffee, it is nice to know which product you already had (orange juice or chocolate milk) has the highest gross margin. While you’re expanding your assortment, advertising costs don’t increase.
I’m going out of a simple example.In a factory, the production labor costs and the cost of machinery will also be allocated to a particular product.
Accounting is not a standard mould that is the same for every company. You need to look at what a company does and which reporting gives the best insight.And at the same time keep all your key figures on 1 A4tje:)
In addition, there may still be differences between internal and external reporting.In order to keep the figures understandable for external parties, there are strict reporting guidelines to which listed companies must adhere, for non-listed companies the guidelines are somewhat smoother.
Gross margin +/+ 70,000 euro = turnover-/-purchase costs
You can increase the gross margin naturally by selling more, but also by buying smarter.Many oranges at the same time, but again not so much that they are corrupted before you need them (even if you have to throw them away they are still purchasing costs). If you have just bought 50,000 cups with the old logo, you are not doing a smart purchase.
Gross margin is more important than turnover.If “The juicy citrus” has a fantastic year and the sale doubles, the turnover becomes 280,000 euro. But it would be kunen that the same year the orange harvest failed and the price of the oranges quadrupled. The purchase costs rise to 4.30 Euro per cup of juice. The selling price may not be adjusted because the landlord has contracted it in exchange for a cheap rent. The gross margin per cup is now only 70 cents. Even though they sold 2x as much, the gross margin in total comes out at 56,000 x 70 cents = 39,200 euros, compared to 70,000 euro with the sales of 28,000 cups described above.
So the turnover doubles: 280,000/140,000 = 200% but due to the increase in the purchase the gross margin almost halves: 39,200/70,000 = 56% which made the year with the lower turnover a much better year than the year with the higher turnover.
Wise lesson: If you know only the turnover figures from a company, you won’t be aware of the profitability at all.
Operating expenses-/-36,000 euro
Biggest expense, but at the same time the face of the juice shop, were the two guys who worked there.They do this in the start-up phase as a side job for a few hours a day and have agreed to pay themselves a small salary (each 1,000 euro per month). The rental was very low as the owner of the station wanted to have the kiosks filled to improve the atmosphere on the station (300 euros per month). The owner of the kiosk hopes to make the rental of the other shops easier, and sees the lost rent as marketing costs.
Furthermore, “the juicy citrus” still had costs for the administration, insurance, compulsory inspections, promotion via Google AdWords and caps with orange print that they are handing out on the platforms (700 Euro per month).Total 3,000 euros per month in operating costs.
EBITDA +/+ 34,000 euro
The abbreviation EBITDA stands for Earnings Before Interest Taxes Depreciation and Amortization.In Dutch: Profit for interest tax amortisation and depreciation. This intermediate count is particularly interesting because it indicates how much money (cash flow) is being won with the business activities.
This is very important to assess whether a company can pay off its debts and whether investments can be made in production resources for expansion and replacement.
The profit result does not have to be equal to the amount you receive in cash.This is due to depreciation on investments.
“The juicy citrus” has invested at the start of the company in a renovation and furniture for the shop, a bar and some fruit presses.All in all, they were 50,000 euros lost here. However, it is expected that these matters should be used for a longer period. It would therefore not be a “good merchant use” to pick it up at 1x of the profit. The first year would be heavily loss-giving, and the years thereafter far too positive, because still of furniture and fruit presses is used. Therefore, the agreement is that this type of purchase is depreciated in 5 or 10 years, depending on the expected useful life, and the guidelines of the tax authority. Our shop will write down the investment in 5 years. When a purchase of 50,000 euro means 10,000 euros per year.
Operating result (= = EBIT) +/+ 24,000 euro
To assess the profitability of the company, the ratio between gross margin and operating costs is important.If those two are very close together, it means that a slight decline in gross margin will lead to loss. The operating result (EBIT) is the difference between these two posts.
If the operating result is very low it would be wise to see if you can actually sell that chocolate milk so that on cold days there is also turnover, while your operating costs do not increase appreciably (staff is still there, the Depreciation is ongoing, and the rent does not increase either).
The abbreviation EBIT means Earnings Before Interest & Tax (profit for interest and taxes).This corresponds to the operating result.
Interest and taxes-/-7,600 euro
How much interest you pay has to do with the way you financed your investments and your working capital.If a company has enough money itself and does not have to lend it, there are no visible interest costs either. After all, you pay no interest to yourself. However, you have to ask yourself if you could not earn more if you just put your money on the couch. This is the English-known term “Return on investment”
It may also be that the interest rate is a positive one, so income instead of costs.For example, if the company has lent itself money, which often happens from holdings to operating companies. The holding company then has interest income.
For the investments, “the juicy Citrus” has borrowed money from the bank.They must pay an annual interest rate of 7%. The first year is 50,000 Euro x 7% = 3,500 Euro. This amount has to be refunded in 10 annual instalments to the bank (repayments).
The taxes do not care a lot per country, and also change over time.A company can hardly exert any influence on this. That is why it is always mentioned separately.
In The Netherlands, corporation tax is 20% and higher profits are 25%.For the first year “the Juicy Citrus” pays 20% of 20,500 euro = 4,100 euro.
Net profit +/+ 16,400 euro
And so we ended up at the bottom of the line.
In money, however, they have kept 26,400 euros.Because the depreciation is cost, but no expenses. However, they have borrowed the money for the investment from the bank and they have to repay them in 10 years. In this case, it also costs 5,000 euros and the amount of money received is 21,400 euro.
It is important to look at the financing of a company.This type of data is not found in the profit and loss account but on the balance sheet.
All steps in succession:
+/+ 140,000 turnover
-/-70,000 purchase costs
= = 70,000 Gross margin
-/-36,000 operating costs
= = 34,000 EBITDA
= = 24,000 operating result = = EBIT
-/-7,600 interest and tax
= = 16,400 Net profit
Cashflow = 34,000 EBITDA-/-7,600 interest and tax-/-5,000 repayment = = 21,400