Flavors of Profitability
August 5, 2010, 12:00 am
Copyright © 2010 Integrated Profitability TM
At the end of the day, there is only one bottom line profitability number for any given time period:
All revenue less
All expenses (including taxes) equals
Net Profit
However, different sub-sets of intermediate “profitability” calculations provide useful insight into how well your business is doing. These sub-sets may help you make better business decisions, especially in the areas of pricing and investments.
1. Gross Margin
Total Revenue less
Cost of Goods Sold equals
Gross Margin
For this calculation, total revenue is the amount of income actually received; i.e., discounts, rebates, and so forth have already been taken out.
“Cost of Goods Sold” refers to the direct costs incurred in producing the products or services that were sold to generate the revenue.
“Gross Margin” tells you how much income is left over to cover other expenses: sales costs, customer service, marketing, and all types of overhead.
2. Contribution to Overhead
After “Gross Margin,” one might want to go a step further and distinguish between “customer-facing” expenses (e.g., sales, customer service) and “support” expenses (e.g., finance, audit, human resources, management).
“Contribution to Overhead” tells you how much money there is to cover overhead, after paying for everything necessary to deliver products and services to the market.
3. Income from ongoing operations
The concept here is to separate ongoing from discontinued operations. A further refinement is to isolate all one-off transactions that are not part of the company’s core business. Examples include asset sales or unrelated gains/losses on investments.
These figures allow you to remain focused on your main business, without the potential clouding effect of unrelated activities.
4. Profit before Taxes
Looking at “net-profit” before taxes sometimes helps to keep the focus on the results of the company’s core business(es); without the distraction of how much, or how little, tax the company pays.
The purpose of each flavor of revenue is to provide clearer insight into challenges and opportunities embedded in the operation of your business.
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 74
Telephone: 925-202-6244
Copyright © 2010 Integrated Profitability TM
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