We shall discuss on how we can arrive at our organisation's profit and loss without getting into the core financial side of the business, this is also known as Income statement. I have kept it as simple as possible for retail business users to understand the calculation mechanism and the various factors that impact our profits. I have not included capital expense, re-investment of funds, expansion expenses, paid-up stock value, creditors, debtors, dividends, etc. I have only considered a few simple expense and revenue components to give an understanding of how we can arrive at our Income Statement
Before we begin with the workings, let us understand the below terms that will be used in the calculations that follow :
TURNOVER
In simple business terms turnover is nothing but our front line sales i.e. the sales value realized after deduction of VAT, sales and service/miscellaneous taxes that are collected from customers.
COGS
This is the cost of goods that are sold i.e. (Weighted average cost of the goods sold X quantity sold). This helps us understand the purchase cost incurred for the sale of a good and this amount does not include VAT in it. This is the weighted average of the unit cost at which the goods are purchased. Refer "RETAIL FORMULAE - THEIR USAGE AND BENEFITS TO BUSINESS OPERATIONS" post to know how it is calculated
EBITDA
This is the Earnings that an organisation makes after its operational expenses and before applying Interests, Taxes on earnings, Depreciation of assets and amortisation cost. This is a simple base figure or percentage what a business makes from the turnover after incurring variable/ fixed operational costs. It gives us a picture on how efficient we operate our business and how much room we have for applying the other financial expenses as mentioned above.
PBT
Profit Before tax or gross profit that an organisation achieves before paying the tax on earnings. This value can also be arrived at as a percentage by dividing it with Turnover value
PAT
Profit after tax or net profit that an organisation achieves after paying the tax on earnings. This value can also be arrived at as a percentage by dividing it with Turnover value
OVERHEADS/ OPERATION EXPENSES
Every Business will have over head costs that are differentiated as fixed and variable cost for the given financial period. Examples for fixed expenses are Rent paid, Annual Maintenance Charges, etc.,
and for variable expenses are Marketing, Wages, Electricity & Water, Repair and Maintenance, etc.,
For further details check out the post "OPEX and CAPEX - Fixed and Variable Costs"
DEPRECIATION
Not all assets acquired by an organization will appreciate in value. Most of the assets depreciate in value over a period of time and it has to be eventually disposed for purchase of a new one. We cannot write off the total value of the asset after a few years in a single fiscal year in one go as it may lead pull down profits for the financial year drastically and more over it is not the right thing to do too for we have used the asset in business over a period of time. In order to manage this, the business will write off a percentage of the asset value as depreciation every year throughout the asset's life time.
AMORTISATION
Every Business will have to invest in technology, licenses and hardware but this should not be totally consumed as a expense for a single financial quarter or year because we will use them over a period of time though they are paid up front. So the lifespan of the technology, hardware and license investment is projected and the investment is split equally throughout the period. This is known as amortisation.
TAX
This is no the VAT or Service tax collected on behalf of the government. This is the actual tax on revenue that the organisation has to pay to the government. The revenue that will be considered here is the net revenue after deduction of all expenses, amortisation expense and depreciation.
I will summarise the workings at 4 levels i.e. Turnover, EBITDA, PBT and PAT with an illustration.
Retailer ABC has taken a franchise for Apple products in 4 States in India. He has 20 stores that are operational and sells all the latest apple gadgets. Lets see his sales for a quarter from April 2016 till June 2016 for both of his stores as given below
Based on the above sales figures we shall arrive at our EBITDA and PAT
Incomes
Total Gross Sales for the period (A) : 67,35,00,000
Total VAT Collected : 8,27,10,526 (-)
Total Net Sales (Turnover)(B)=(A/(1+VAT%)) or (A-V) : 59,07,89,474
Cost of Goods Sold (G) : 49,00,00,000 (-)
Total Revenue (C) = (A-B) : 10,07,89,474
Turnover Net Margin % (A-G)/A X 100 : 17%
Expenses & Loss
Rental expense : 1,10,00,000
Salaries and Wages : 1,20,00,000
Repair and Maintenance : 3,50,000
Marketing Expense : 6,00,000
Electricity and Water : 12,00,000
Staff Welfare : 13,00,000
IT and Administrative Expense : 45,00,000
Insurance Expense : 10,00,000
Logistics : 10,00,000
Before we begin with the workings, let us understand the below terms that will be used in the calculations that follow :
TURNOVER
In simple business terms turnover is nothing but our front line sales i.e. the sales value realized after deduction of VAT, sales and service/miscellaneous taxes that are collected from customers.
COGS
This is the cost of goods that are sold i.e. (Weighted average cost of the goods sold X quantity sold). This helps us understand the purchase cost incurred for the sale of a good and this amount does not include VAT in it. This is the weighted average of the unit cost at which the goods are purchased. Refer "RETAIL FORMULAE - THEIR USAGE AND BENEFITS TO BUSINESS OPERATIONS" post to know how it is calculated
EBITDA
This is the Earnings that an organisation makes after its operational expenses and before applying Interests, Taxes on earnings, Depreciation of assets and amortisation cost. This is a simple base figure or percentage what a business makes from the turnover after incurring variable/ fixed operational costs. It gives us a picture on how efficient we operate our business and how much room we have for applying the other financial expenses as mentioned above.
PBT
Profit Before tax or gross profit that an organisation achieves before paying the tax on earnings. This value can also be arrived at as a percentage by dividing it with Turnover value
PAT
Profit after tax or net profit that an organisation achieves after paying the tax on earnings. This value can also be arrived at as a percentage by dividing it with Turnover value
OVERHEADS/ OPERATION EXPENSES
Every Business will have over head costs that are differentiated as fixed and variable cost for the given financial period. Examples for fixed expenses are Rent paid, Annual Maintenance Charges, etc.,
and for variable expenses are Marketing, Wages, Electricity & Water, Repair and Maintenance, etc.,
For further details check out the post "OPEX and CAPEX - Fixed and Variable Costs"
DEPRECIATION
Not all assets acquired by an organization will appreciate in value. Most of the assets depreciate in value over a period of time and it has to be eventually disposed for purchase of a new one. We cannot write off the total value of the asset after a few years in a single fiscal year in one go as it may lead pull down profits for the financial year drastically and more over it is not the right thing to do too for we have used the asset in business over a period of time. In order to manage this, the business will write off a percentage of the asset value as depreciation every year throughout the asset's life time.
AMORTISATION
Every Business will have to invest in technology, licenses and hardware but this should not be totally consumed as a expense for a single financial quarter or year because we will use them over a period of time though they are paid up front. So the lifespan of the technology, hardware and license investment is projected and the investment is split equally throughout the period. This is known as amortisation.
TAX
This is no the VAT or Service tax collected on behalf of the government. This is the actual tax on revenue that the organisation has to pay to the government. The revenue that will be considered here is the net revenue after deduction of all expenses, amortisation expense and depreciation.
I will summarise the workings at 4 levels i.e. Turnover, EBITDA, PBT and PAT with an illustration.
Retailer ABC has taken a franchise for Apple products in 4 States in India. He has 20 stores that are operational and sells all the latest apple gadgets. Lets see his sales for a quarter from April 2016 till June 2016 for both of his stores as given below
Based on the above sales figures we shall arrive at our EBITDA and PAT
Incomes
Total Gross Sales for the period (A) : 67,35,00,000
Total VAT Collected : 8,27,10,526 (-)
Total Net Sales (Turnover)(B)=(A/(1+VAT%)) or (A-V) : 59,07,89,474
Cost of Goods Sold (G) : 49,00,00,000 (-)
Total Revenue (C) = (A-B) : 10,07,89,474
Turnover Net Margin % (A-G)/A X 100 : 17%
Expenses & Loss
Rental expense : 1,10,00,000
Salaries and Wages : 1,20,00,000
Repair and Maintenance : 3,50,000
Marketing Expense : 6,00,000
Electricity and Water : 12,00,000
Staff Welfare : 13,00,000
IT and Administrative Expense : 45,00,000
Insurance Expense : 10,00,000
Logistics : 10,00,000
Shrinkage (Variance due to loss of stock) : 10,00,000
Total Expense (D) : 2,94,50,000 (-)
EBITDA (E) = (C-D) : 7,13,39,474
EBITDA % (E/B X 100) : 12.1%
The above shows how we can work a simple income statement by which we can get to know how our business operations is performing, which are the areas we need to work on and where we need to concentrate to reduce our expenses. All expenses can be expressed as a percentage of turnover to see which one of them actually eat into our profits more. I have shown the same in the below pictorial representation for all expenses as a percentage of turnover. I hope this helps to get an overview of an income statement.
Total Expense (D) : 2,94,50,000 (-)
EBITDA (E) = (C-D) : 7,13,39,474
EBITDA % (E/B X 100) : 12.1%
Interest Paid : 30,00,000 (-)
Amortisation value : 55,00,000 (-)
Depreciation value : 20,00,000 (-)
Total Income before Tax : 6,08,39,474
Tax Payable : 1,05,28,000 (-)
Profit After Tax (P) : 5,03,11,474
Profit Percentage to Turnover (P/B X 100) : 8.5%
The above shows how we can work a simple income statement by which we can get to know how our business operations is performing, which are the areas we need to work on and where we need to concentrate to reduce our expenses. All expenses can be expressed as a percentage of turnover to see which one of them actually eat into our profits more. I have shown the same in the below pictorial representation for all expenses as a percentage of turnover. I hope this helps to get an overview of an income statement.
