Understanding the Profit and Loss (P&L) Sheet
The Profit and Loss (P&L) statement is like a financial report card for a business. It shows how much sales does the business earned, spent, and what was left as profit over a specific period. Let’s explore each part in detail with examples.
1. Revenue (Sales): How Much Sales Did the Business Make?
• Revenue – New Car Sales: Imagine the business sells cars to customers. The money earned from these sales is called revenue from new car sales.
o Example: The company earned 10,955,000 from selling new cars.
• Revenue – Accessories: Sometimes customers buy extra items like custom rims or performance exhausts for their cars. The money earned here is an additional revenue stream.
o Example: The company earned 2,559,780 from selling these accessories.
• Total Revenue: This is the sum of all revenue sources.
o Formula: (Revenue – New Car Sales) + (Revenue – Accessories) = Total Revenue
o Calculation: 10,955,000 + 2,559,780 = 13,514,780
So, the total money earned by the business is 13,514,780.
2. Cost of Revenue (Direct Costs): What Did the Business Spend to Make Money?
• Raw Materials: These are the physical items needed to make a product. For cars, this might include metal, rubber for tires, and leather for seats.
o Example: The company spent 5,280,150 on raw materials.
• Manufacturing and Assembly Costs: These Costs include all expenses related to producing and assembling a product, such as labor, and the development and installation of systems like software or electronics, etc. The cost to develop and install these is part of the cost of revenue.
o Example: The company spent 3,103,340 on these features.
• Cost of Revenue: The Cost of Revenue represents all the direct expenses involved in producing new cars.
o Example: The company spent 8,383,490 on these features.
3. Gross Profit: The Money Left After Direct Costs
• Gross profit is what remains after subtracting the cost of revenue from the total revenue. This shows how much money the business made before deducting other expenses.
o Formula: Gross Profit = Total Revenue – Cost of Revenue
o Calculation: 13,514,780 − 8,383,490 = 5,131,290
So, the business’s gross profit is 5,131,290. This means the company has this amount left to cover its other expenses.
4. Operating Expenses: Running the Business
• Operating expenses are the costs other than direct cost a business incurs to run its operations smoothly. These are indirect costs, not directly tied to producing goods but still necessary for the business.
o Selling Expenses: Costs like freight charges (transporting goods), warehouse storage, and managing retail stores.
Example: The business spent 825,790 on these.
o General Expenses: Office rent, executive salaries, and IT systems are part of this category.
Example: The company spent 522,000 here.
o Staff Cost: 300,500
o Extended Warranty: 240,580
o Commission for Dealers: 85,000
o Total Operating Expenses: Adding all operating expenses gives the total.
Formula: Operating Expenses = Selling Expenses + General Expenses
Calculation: 825,790 + 522,000 + 300,500 + 240,580 + 85,000 = 1,973,870
So, the total cost to run the business is 1,973,870.
5. Operating Profit
• Operating Profit is the profit a business earns after deducting its operating expenses (such as selling, distribution, and administrative costs) from its gross profit.
• It represents how much money the business made from its core activities before considering finance costs (like interest) and taxes.
o Formula: Operating Profit = Gross Profit − Operating Expenses
o Calculation: 5,131,290 − 1,973,870 = 3,157,420
What Does This Mean?
The business earned 3,157,420 from its core operations after covering all operating costs. This amount does not yet include finance costs or taxes
6. Other Income: What is It and Why Does It Matter?
Other Income refers to earnings that are not part of the regular operations of the business. This can include any income generated from secondary activities that do not directly relate to the core business functions, such as interest income, investment gains, or rental income. In the context of a car dealership, for example, other income could include money earned from renting out parts of its property, selling off scrap materials, or interest earned from cash reserves or investments.
In the example, the company earned 1,793,950 in Other Income, which is split into two accounts:
• Interest Income: 1,300,000 (Earnings from investments or savings accounts)
• Rental Income: 493,950 (Money earned from renting out unused property or space)
Formula:
Other Income = Rental Income + Interest Income
Calculation:
818,000 + 975,950 = 1,793,950
7 . EBIT (Earnings Before Interest, Taxes)
• EBIT is similar to Operating Profit but focuses on a business’s operational profitability by excluding non-cash expenses like depreciation and amortization. It provides a clearer picture of how well the company is performing in its core activities without the influence of financing and accounting decisions.
o Formula: EBIT = Operating Profit + Other Income
o Calculation: 3,157,420 + 1,793,950 = 4,951,370
What Does This Mean?
The EBIT is 4,951,370, which shows the company’s profit from operations before accounting for financing costs, taxes, and non-cash expenses.
Key Differences Between Operating Profit and EBITDA
| Metric | Includes | Excludes | Purpose |
|---|---|---|---|
| Operating Profit | Gross profit minus operating expenses | Finance costs, taxes | Measures profitability after operating costs are deducted. |
| EBIT | Operating Profit + Depreciation/Amortization | Finance costs, taxes, depreciation, amortization | Focuses purely on operational profitability, ignoring accounting effects. |
Why Are These Metrics Important?
1. Operating Profit:
o Shows how efficiently the business runs its core operations.
o A higher operating profit means the business controls costs well.
2. EBITDA:
o Helps compare profitability across companies by ignoring non-operational factors.
o Especially useful for businesses with large capital expenditures, as it removes the effect of depreciation.
8. Finance Cost: Interest Paid on Loans
Finance cost includes any interest paid on loans or credit facilities used by the business.
• Example: Assume the business paid 198,000 as finance costs.
9. Profit Before Tax (PBT)
This is the profit remaining after deducting finance costs but before accounting for taxes.
• Example: 4,753,370
10. Tax Expense
Tax is the portion of the profit that the business must pay to the government.
• Example: Let’s assume the tax is 1,426,011.
11. Net Profit: The Final Score
• After covering all costs and expenses, what’s left is the net profit. This is the business’s “bottom line” and represents its true earnings.
o Formula: Net Profit = Profit before Tax – Tax
o Calculation: 4,753,370 – 1,426,011 = 3,327,359
So, the net profit is 4,022,844. This is the amount the business has earned after accounting for all its expenses.
Summary of the P&L Breakdown
| Accounts | Amount | Description |
|---|---|---|
| Revenue – New Car Sales | 10,955,000 | Money earned from selling new cars. |
| Revenue – Accessories | 2,559,780 | Money earned from selling extra parts. |
| Total Revenue | 13,514,780 | A sum of all revenue streams. |
| Raw Material Costs | 5,280,150 | Costs of materials like metal and leather. |
| Manufacturing and Assembly Cost | 3,103,340 | Engine assembly, Interior fittings installation, Vehicle painting, and finishing, Labor cost |
| Cost of Revenue | 8,383,490 | Total direct costs to generate revenue. |
| Gross Profit | 5,131,290 | Revenue after subtracting direct costs. |
| Selling Expenses | 825,790 | Costs for freight, storage, and retail management. |
| General Expenses | 522,000 | Costs for rent, salaries, and IT systems. |
| Staff Cost | 300,500 | Salaries and wages of the staff. |
| Extended Warranty | 240,580 | Cost for providing extended warranty coverage. |
| Commission for Dealers | 85,000 | Payments to dealers as commissions. |
| Operating Expenses | 1,973,870 | Total cost to run the business. |
| Operating Profit | 3,157,420 | Profit from core operations after operating costs. |
| Other Income | 1,793,950 | Earnings from non-operational sources like interest and rental income. |
| EBIT | 4,951,370 | Profit from operations before interest and taxes. |
| Finance Cost | 198,000 | Interest paid on loans or credit facilities. |
| Profit Before Tax (PBT) | 4,753,370 | Profit remaining after finance costs. |
| Tax Expense | 1,426,011 | Tax the business owes based on the profit. |
| Net Profit | 3,327,359 | Final profit after accounting for all expenses. |
Why Is the P&L Important?
The P&L helps businesses:
• Track performance: Understand how much money they’re making or losing.
• Control costs: Identify areas where expenses can be reduced.
• Plan for the future: Set goals based on financial health.
