If you’re running a product-based business or thinking of pitching your idea to investors, you might have come across terms like EBITDA, COGS, and others. While they sound technical, they’re actually quite simple when broken down. Let me walk you through these in the easiest way possible, along with formulas to calculate them.
1. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
- What it means: EBITDA is your company’s pure profit from its core business operations, without distractions from interest, taxes, or long-term asset costs.
- Formula: EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
- Why it’s important: Investors use EBITDA to evaluate your business's core profitability without external factors like debt or taxes.
- Example: If your net income is ?30,000, interest is ?5,000, taxes are ?10,000, and depreciation is ?5,000, your EBITDA = ?30,000 + ?5,000 + ?10,000 + ?5,000 = ?50,000.
2. COGS (Cost of Goods Sold)
- What it means: COGS is the total cost of producing or buying the products you sell. It includes raw materials, labor, and manufacturing expenses.
- Formula: COGS = Beginning Inventory + Purchases During the Period - Ending Inventory
- Why it’s important: It helps determine your product’s production cost, which directly impacts your pricing and profit margins.
- Example: If your beginning inventory is ?20,000, purchases are ?50,000, and ending inventory is ?10,000, your COGS = ?20,000 + ?50,000 - ?10,000 = ?60,000.
3. Gross Profit
- What it means: Gross profit is the amount of money left after subtracting COGS from your revenue.
- Formula: Gross Profit = Revenue - COGS
- Why it’s important: It shows how efficiently your business is managing its production costs.
- Example: If your revenue is ?1,00,000 and your COGS is ?60,000, your gross profit = ?1,00,000 - ?60,000 = ?40,000.
4. Net Profit
- What it means: Net profit is your final earnings after deducting all expenses, including operating expenses, taxes, and interest.
- Formula: Net Profit = Revenue - Total Expenses (COGS + Operating Expenses + Taxes + Interest)
- Why it’s important: It tells you how much money your business actually earns.
- Example: If your revenue is ?1,00,000 and your total expenses are ?85,000, your net profit = ?1,00,000 - ?85,000 = ?15,000.
5. Operating Expenses (OPEX)
- What it means: OPEX includes the day-to-day costs of running your business, like rent, salaries, utilities, and marketing.
- Formula: There’s no specific formula for OPEX, but it is the sum of all non-production-related expenses.
- Why it’s important: Keeping OPEX under control ensures more profits for your business.
- Example: If you spend ?10,000 on rent, ?15,000 on salaries, and ?5,000 on marketing, your OPEX = ?10,000 + ?15,000 + ?5,000 = ?30,000.
6. Revenue
- What it means: Revenue is the total income from selling your products or services.
- Formula: Revenue = Price Per Unit × Units Sold
- Why it’s important: It’s the starting point to measure your business's success and growth.
- Example: If you sell 200 products at ?500 each, your revenue = ?500 × 200 = ?1,00,000.
Why These Terms Matter
Understanding these terms helps you better analyze and communicate your business's performance. Investors often ask about them to evaluate your growth potential, profitability, and efficiency.
By focusing on these metrics, you’ll gain more confidence in managing your business and presenting your ideas to others.
