Profit

Welcome to the fourth edition of the go-to newsletter for Start-ups and SME's - The SME Snapshot. We are here to help with concise, easy-to-digest tips and advice on how best to look after your business - from the experts at AFP Services. To find out more about AFP and what we do, click here. To make sure you don't miss next month's edition - subscribe!

This month, we are breaking down some business jargon and getting to the root of what it means – we’re looking at Profit.

Start a conversation about investment and you’ll be asked “what’s your profit?”.

1.???What is profit?

Profit, in the simplest terms, is the money you make. The problem is that there are many different definitions of profit.

??Gross Profit is the difference between how much you sell a product for and how much you pay for it. Gross Profit is actually quite often called Gross Margin.

??But remember all of the other costs that you have to spend to sell your product – i.e., delivery costs, packaging, discounts and returns - these are all “costs of goods sold” or COGS which are all costs that can be deducted from sales to get your Contribution.

??From there, you can deduct all your overheads such as payroll costs, rent and travel costs, to get your Operating Profit (sometimes called EBITDA – or Earnings before tax, interest, depreciation and amortisation).

??From that, you can deduct depreciation, tax and financing cost to get your Net Profit, sometimes called “The Bottom Line”.

2.???How does it fit into financial reporting?

It’s important to note that the net profit of your company doesn’t carry over from one accounting period to the next. The net income is transferred into retained earnings after period end is closed, which appears on the Balance Sheet.

You may then use this to make payments to shareholders (called a dividend), or might decide to use it to buy stock, or even keep all earnings reported on the bottom line for future needs such as location expansion of product development. Many choose to re-invest it into the business in some way.

3.???Why is profit such a big indicator of if the business is doing “well” or not?

This is mainly due to the fact it considers so many different factors in its calculations – net profit’s location at the bottom of the statement means all ordinary expenses and incomes are included. Any strategies put into the business over a period of time should show results through the bottom line. That’s why it is commonly known as an indicator of how effective all means have been in increasing the efficiency and profitability of the business.

4.???Is there anything that isn’t included in the profit number?

The profit figure shows what has been done and dusted in that period. It does not show what you still have. Stock, bank account balances, what you owe, and capital assets are all excluded from the profit figure as they all carry forward to the next period and are reported in the Balance Sheet. Though many investors and business partners will be interested in that all-important profit figures, the full story is told through full management accounts packages, that give the context that backs the final numbers up. Using those numbers to guide your business plans and strategies are the next crucial steps, and for that, you need the right data, and the right support.

At AFP, we create monthly management reports for a broad range of businesses, from Start-ups looking for funding, all the way up to ￡30 million turnover enterprises looking to expand into new locations. With clear commentary and informed guidance throughout, we don’t operate on a one conversation a month model like typical accounts teams – we are in continuous communication with you, so the story of your business is as full as possible. We become a part of your business, celebrating successes together, and working through obstacles as a united team.

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Looking for support in growing your business? Contact us at [email protected]. To find out more about how we help businesses grow the smart way, visit our website here.

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