Calculating Profit
April 27, 2009, 12:40 pm
Figuring out the Bottom Line.
Back to Profit 101. Today’s topic is the mundane event of doing the math to come up with net profit, or as it is frequently labeled, Net Income. While there is a short paper that provides a brief primer on how to do the calculation, today’s blog is basically about the fundamental need to calculate one’s profit which, by doing so, provides the company’s (or any defined activity) profitability for a given time period (e.g., monthly, quarterly, annually). Although calculating profitability on a routine basis may be intuitively obvious, I didn’t want to make an assumption that everyone and every business is regularly doing so.
Overall, revenue is tracked and profit is calculated. The paper behind this blog outlines how to calculate the profit of a company or any other specifically delineated commercial entity, functional group or specific project.
Usually, it’s obvious WHAT is going to have its profit calculated. However, if there is any question, ambiguity or, worse, disagreement, every single uncertainty must be discussed, clarified and resolved up front. For example, do you want to see Ford worldwide? Or Ford without its financing arm? Or Ford International (outside the USA); with or without the relevant financing arm portion?
After confirming the scope, the profit formula is quite simple: total revenue minus total expense.
The intent of the calculation is to accurately report the profit of an entity. Without knowing profit, you don’t know if money is being made. Without knowing that, you really have no idea how much longer you will be able to stay in business.
To calculate profit, certain data, skills and experience are needed. First: specify the area under study because that sets boundaries and dictates what information will need to be collected.
Comparing Profit
Net profit (revenue – expense) varies significantly between businesses. Here are four retailers known in the East Bay. Financial data was obtained from their websites (same rules as used for “Profitability: Blog 4″): the reported figures may not be comparable across the four companies (e.g., continuing operations, consolidations).
|
Company |
Rev |
Exp |
Net |
| Kohl’s | $16.4 | $15.5 | $0.9 |
| Sears Hldg | $46.8 | $46.3 | $0.5 |
| Target | $64.9 | $62.7 | $2.2 |
| Wal-Mart | $378.8 | $366.1 | $12.7 |
Source: Company websites, financial data ($ bn)
Look! I know we make money…
It is in the best interest of everyone to know whether or not an entity is making money. This is especially true for the Small Business owner, whose livelihood probably depends on the success of the business.
For larger companies, a plethora of reporting requirements and regulations necessitate financial reporting. Small businesses have similar requirements.
So, you’ve calculated your profit and it’s positive. Are you done? Is the profit good? Any hidden opportunities? issues?
Reporting that focuses specifically on profitability takes financial reporting one level deeper: beyond the numbers, from a business sense, what’s driving profitability? Is it revenue or expense? What momentum is embedded in the current numbers?
There are many facets to profitability. Profitability Reporting gets at the “How” and “Why.” At the end of the day, is it better to know or not know?
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 7
© 2009 Integrated ProfitabilityTM
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