이익 (회계),Profit

[BLESS]

■이익 (회계), Profit

위키백과, 우리 모두의 백과사전.

   

회계에서의 현금흐름은 개념이 다르다. 회계에서의 이익은 수익에서 비용을 뺀 것이다. 여기에다가 수익보다 비용이 더 많아서 적자가 난 경우 이익이 아니라 손실이라고 부른다.

이익과 현금흐름을 구별하는 주된 까닭은 두 가지로 나뉜다.

1. 중도의 거래에 대해서는 채권, 채무의 발생 시점으로 손익을 인식해야 한다.
2. 설비 투자의 경우, 감가상각을 실시해야 한다.

손익계산서의 경우, 회사의 상황을 지켜 보기 위해 몇 가지 단계로 나눠 이익을 계산한다.

이익의 종류

• 매출총이익: 총이익이라고도 하며, 매상고(판매액)에서 매상 원가를 뺀 것이다. 기업이 제공하는 상품 서비스의 경쟁력을 나타내는 지표라고 할 수 있다.
• 영업이익: 사업 이익, EBIT라고도 하며, 매상 총이익에서 판매비와 일반 관리비를 뺀 것이다. 판매 조직이나 본사 운영의 효율성을 포함한 기업 본업으로서의 수익력을 나타내는 지표라고 할 수 있다.
• 경상이익: 영업이익에서 영업 외의 수익(수취 이자, 수취 배당금, 유가증권 매각이익 등)을 더하고 영업 외의 비용(지불 이자 등)을 뺀 것이다. 자금 조달이 잘 되는지 잘 안 되는지를 포함하여 기업의 일정한 채산성을 나타내는 지표이다.
• 순이익: 경상이익에 특별이익을 더하고 특별손실을 뺀 것이다.
• 유보이익: 회계상 기타자본요소와 이익잉여금을 합한 금액을 유보이익이라고 하는데, 이는 기업이 영업활동에 의해 획득한 이익 중 사내에 유보된 금액을 의미한다. ^[1]

같이 보기

• 수익
• 비용
• 손실
• 원가
• 자본
• 자산
• 부채
• 이익

바깥 고리

• 이동 ↑ IFRS 회계원리 제3판, 송상엽 저, 웅지 출판, p. 461
  

■이익잉여금

위키백과, 우리 모두의 백과사전.

   

이익잉여금(利益剩餘金)은 기업의 영업활동이나 재무활동의 결과 축적된 이익으로 사내에 유보된 부분이다. 이익잉여금은 손익계산서와 재무상태표를 연결시키는 항목으로 수익과 비용의 집합인 손익계정에서 산출된 당기순이익은 이익잉여금을 증가시키고 당기순손실은 이익잉여금을 감소킨다.

종류

• 이익준비금

• 임의적립금

• 미처분이익잉여금

• 배당

각주

재무상태표 및 손익계산서 계정 분류
자산	유동자산 (당좌자산 재고자산) 고정자산 (투자자산 유형자산 무형자산 기타비유동자산)
부채	유동부채 고정부채
자본	자본금 자본잉여금 이익잉여금 자본조정 기타포괄손익누계액
비용	매출원가 판매비와 관리비 영업외비용 특별손실 법인세비용
수익	매출액 영업외수익 특별이익

■Profit                       

What is 'Profit'

Profit is a financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity. Any profit that is gained goes to the business's owners, who may or may not decide to spend it on the business.

Calculated as:

BREAKING DOWN 'Profit'

Profit is the money a business makes after accounting for all expenses. Regardless of whether the business is a couple of kids running a lemonade stand or a publicly traded multinational company, consistently earning profit is every company's goal. As a result, much of business performance is based on profitability in its various forms. Some analysts are interested in top-line profitability, whereas others are interested in profitability before expenses, such as taxes and interest, and still others are only concerned with profitability after all expenses have been paid.

There are three major types of profit that analysts analyze: gross profit, operating profit and net profit. Each type of profit gives the analyst more information about the company's performance, especially when compared against other time periods and industry competitors. All three levels of profitability can be found on the income statement.

Gross, Operating and Net Profit

The first level of profitably is gross profit. Gross profit is sales minus the cost of goods sold. Sales is the first line item on the income statement and the cost of goods sold, also referred to as CGS, is generally listed just below it. For example, if company A has $100,000 in sales and a CGS of $60,000, it means the gross profit is $100,000 minus $60,000, which is $40,000. Divide gross profit by sales for the gross profit margin, which is $40,000 divided by $100,000, or 40%.

The second level of profitability is operating profit. Operating profit is calculated by deducting operating expenses from gross profit. Gross profit looks at profitability after direct expenses, and operating profit looks at profitability after operating expenses. These are things like salaries, general and administrative costs, also referred to as SG&A. If company A has $20,000 in operating expenses, the operating profit is $40,000 minus $20,000, equaling $20,000. Divide operating profit by sales for the operating profit margin, which is 20%.

The third level of profitably is net profit. Net profit is the income left over after all expenses, includes taxes and interest, have been paid. If interest is $5,000 and taxes are another $5,000, net profit is calculated by deducting both of these from operating profit. In this example the answer is $20,000 minus $5,000, minus $5,000, which equals $10,000. Divide net profit by sales for net profit margin, which is 10%.

Gross Profit                  

Gross profit is a company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. Gross profit will appear on a company's income statement or can be calculated with this formula:

Gross profit = revenue - cost of goods sold

Also called "gross margin," "sales profit" and "gross income".

BREAKING DOWN 'Gross Profit'

Gross profit assesses a company's efficiency at using labor and supplies. The metric only considers variable costs, that is, costs that fluctuate with the level of output: materials; direct labor, assuming it is hourly or otherwise dependent on output levels; commissions for sales staff; credit card fees on customer purchases; equipment, perhaps including usage-based depreciation; utilities for the production site; shipping; etc. As generally defined, gross profit does not include fixed costs, or costs that must be paid regardless of the level of output: rent, advertising, insurance, salaries for employees not directly involved in production, and office supplies.

However, it should be noted that a portion of the fixed cost is assigned to each unit of production under absorption costing, which is required for external reporting under GAAP​. For example, if a factory produces 10,000 widgets in a given period, and the company pays $30,000 in rent for the building, a cost of $3 would be attributed to each widget under absorption costing. 

Gross profit shouldn't be confused with operating profit, also known as earnings before interest and tax (EBIT). 

Gross profit can be used to calculate the gross profit margin. Expressed as a percentage, this metric is useful for comparing a company's production efficiency over time. Simply comparing gross profits from year to year or quarter to quarter can be misleading, since gross profits can rise while gross margins fall, a worrying trend that could land a company in hot water. The terminology here can cause some confusion: "gross margin" can be used to mean either gross profit and gross profit margin. Gross profit is expressed as a currency value, gross profit margin as a percentage. The formula for gross profit margin is:

Gross profit margin = gross profit / revenue = ( revenue - cost of goods sold ) / revenue

Gross profit margins vary greatly by industry. Food and beverage stores and construction firms have razor-thin gross profit margins, for example, while the healthcare and banking industries enjoy much larger ones. 

Here is an example of how to calculate gross profit and the gross profit margin, using Ford Motor Co.'s (F) 2014 annual income statement (all numbers in millions of USD):

Revenues
Automotive	135,782
Financial services	8,295
Total revenues	144,077
Costs and expenses
Automotive cost of sales	123,516
Selling, administrative and other expenses	14,117
Financial Services interest expense	2,699
Financial Services provision for credit and insurance loss	305
Total costs and expenses	140,637

To calculate the gross profit, we first add up the cost of goods sold:

Automotive cost of sales ($123,516 m) + FS interest expenses ($2,699 m) + FS provision for credit and insurance loss ($305 m) = $126,520 m

We do not include "Selling, administrative and other expenses," since these are mostly fixed costs. We then subtract the cost of goods sold ($126,520 m) from total revenues ($144,077 m) to obtain a gross profit of $17,577 m.

To obtain the gross profit margin, we divide the gross profit ($17,577 m) by total revenues ($144,077) for a margin of 12.20%. This compares unfavorably to an automotive industry average of around 20%, suggesting that Ford does not operate as efficiently as its peers.

Standardized income statements prepared by financial data services may give slightly different gross profits. These statements conveniently display gross profits as a separate line item, but they are only available for public companies. Investors reviewing private companies' income should familiarize themselves with the cost and expense items on a non-standardized balance sheet that do and don't factor into gross profit calculations.

For more on gross profit, see Understanding Profit Metrics: Gross, Operating and Net Profits.

Profit Margin

Profit margin is part of a category of profitability ratios calculated as net income divided by revenue, or net profits divided by sales. Net income or net profit may be determined by subtracting all of a company’s expenses, including operating costs, material costs (including raw materials) and tax costs, from its total revenue. Profit margins are expressed as a percentage and, in effect, measure how much out of every dollar of sales a company actually keeps in earnings. A 20% profit margin, then, means the company has a net income of $0.20 for each dollar of total revenue earned.

While there are a few different kinds of profit margins, including “gross profit margin,” “operating margin,” (or "operating profit margin") “pretax profit margin” and “net margin” (or "net profit margin") the term “profit margin” is also often used simply to refer to net margin. The method of calculating profit margin when the term is used in this way can be represented with the following formula:

Profit Margin = Net Income / Net Sales (revenue)

Other types of profit margins have different ways of calculating net income so as to break down a company’s earnings in different ways and for different purposes.

See which online broker provides the income statement for different stocks in our Brokerage Review Center.

Profit margin is similar but distinct from the term “profit percentage,” which divides net profit on sales by the cost of goods sold to help determine the amount of profit a company makes on selling its goods, rather than the amount of profit a company is making relative to its total expenditures.

BREAKING DOWN 'Profit Margin'

Rarely can a company’s individual numbers (like revenue or expenditures) indicate much about the company’s profitability, and looking at the earnings of a company often doesn't tell the entire story. Increased earnings are good, but an increase does not mean that the profit margin of a company is improving. For example, suppose one year Company A’s revenue is $1 million and its total expenditures are $750,000, making its profit margin 25% ($1M - $0.75M / $1M = $0.25M / $1M = 0.25 = 25%). If during the following year its revenue increases to $1.25 million and its expenditures increase to $1 million, its profit margin is then 20% ($1.25M - $1M / $1.25M = $0.25M / $1.25M = 0.20 = 20%). Even though its revenue has increased, Company A’s profit margin has diminished because expenses have increased at a faster rate than revenue.

In the same way, an increase or decrease in a company’s expenditures does not necessarily indicate that the company’s profit margin is improving or worsening. Suppose that Company B’s revenue and expenditures in one year are $2 million and $1.5 million, respectively, making its profit margin 25%. The following year the company does some restructuring, reducing its expenditures by eliminating a product line, thereby reducing total revenue as well. If Company B’s revenue and expenditures in the second year are now $1.5 million and $1.2 million, respectively, then its profit margin is now 20%. Even though Company B was able to substantially cut its costs, its profit margin suffered because its revenue decreased more quickly than its expenditures did.

Uses of 'Profit Margin'

Profit margin is a useful ratio and can help provide insight about a variety of aspects of a company’s financial performance.

On a rudimentary level, a low profit margin can be interpreted as indicating that a company’s profitability is not very secure. If a company with a low profit margin experiences a decline in sales, its profit margin will decline even further, leading to a very low, neutral or even negative profit margin.

Low profit margins may also reveal certain things about the industry in which a company operates or about broader economic conditions. For example, if a company’s profit margin is low, it may indicate that it has lower sales than other companies in the industry (a low market share) or that the industry in which the company operates is itself suffering, perhaps because of waning consumer interest (or increasing popularity and/or availability of alternatives) or because of hard economic times or recession.

Profit margin may also indicate certain things about a company’s ability to manage its expenses. High expenditures relative to revenue (i.e. a low profit margin) may indicate that a company is struggling to keep its costs low, perhaps because of management problems. This is an indication that costs need to be under better control. High expenditures may occur for many reasons, including that the company has too much inventory relative to its sales, that it has too many employees, that it is operating in spaces that are too large and thus is paying too much in rent, and for many other reasons. On the other hand, a higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors.

Profit margin can also illuminate certain aspects of a company’s pricing strategy. For example, a low profit margin may indicate that a company is underpricing​ its goods.

Limitations of 'Profit Margin'

Though profit margin is a helpful and popular ratio for gauging a company’s profitability, like any financial metric or ratio it comes with certain accompanying limitations that any investor should consider when considering a company’s profit margin.

While profit margin can be very useful for comparing companies with one another, one should only use profit margin to compare companies within the same industry, and ideally with similar business models and revenue numbers as well. Companies in different industries may often have wildly different business models, such that they may also have very different profit margins, thereby rendering a comparison of their profit margins relatively meaningless. For example, a company selling luxury goods may often have a high profit percentage on its wares while having a low inventory and relatively low overhead, earning modest revenue while maintaining a high profit margin. A consumer staples producer, on the other hand, may have a low profit percentage while having a high inventory and a relatively high overhead, due to a need for a larger work force and more space. The consumer staples company, then, could have very high revenue while having a relatively low profit margin.

Profit margin is also not very useful when considering companies that are losing money, since they have no profit.

Variations of 'Profit Margin'

There are a few variations on profit margin that investors and analysts use to measure more (or less) specific elements of a company’s profit.

One such variation is gross profit margin, which divides gross profit (revenue minus the cost of goods sold including labor, materials and overhead) by revenue earned. This variation comes with certain limitations, such as that management may often have little control over the cost of materials, so gross profit margin is less useful for determining management quality. Additionally, industries with no production process have no or little cost of sales, so gross profit margin is most useful when considering companies that actually produce goods.

One particularly popular variation of profit margin is operating profit margin, which divides operating profit (revenue minus selling, general and administrative expenses) by revenue.

Investors and analysts may often use pretax profit margin, which divides pretax earnings (revenue without deducting tax costs) by revenue.

To learn more about profit margins, check out A Look At Corporate Profit Margins and Profitability Indicator Ratios: Profit Margin Analysis.

Net Profit Margin

                    

Net profit margin is the ratio of net profits to revenues for a company or business segment . Typically expressed as a percentage, net profit margins show how much of each dollar collected by a company as revenue translates into profit. The equation to calculate net profit margin is: net margin = net profit / revenue.

BREAKING DOWN 'Net Profit Margin'

Net margins vary from company to company, and certain ranges can be expected in certain industries, as similar business constraints exist in each distinct industry. Low profit margins don't necessarily equate to low profits. For example, Wal-Mart Stores Inc. has delivered high returns for its shareholders while operating on net margins less than 5% annually. In fact, in the first quarter of 2016, Walmart's profit margin was 2.66%. In contrast, a business with very small operating budget such as an independent contractor working as a freelance writer has a very small overhead and as a result, most of its revenue is tied to profits. However, although freelance writing may have a high profit margin, its annual profits may seem low when compared to a multinational corporation such as Walmart.

Most publicly traded companies report their net margins both quarterly during earnings releases and in their annual reports. Companies that are able to expand their net margins over time are generally rewarded with share price growth, as share price growth leads directly to higher levels of profitability.

How to Calculate Net Profit Margin?

To calculate net profit margin, find the company's revenue, which consists of all the sales, fees or other money the business has collected through the period. To ascertain profits, subtract operating expenses, cost of goods sold (COGS), interest and tax from revenue. If the business pays stock dividends, also subtract those payments from revenue when calculating profit, but do not take common stock dividends into account. Then, simply divide net profit by revenue, and to convert that number into a percent, multiply it by 100.

To illustrate, imagine a business has $100,000 in revenue, but it also has $20,000 in operating costs, $10,000 in COGS and $14,000 in tax liability. Its net profits are $56,000. Profits divided by revenue equals .56 or 56%. A 56% profit margin indicates the company earns 56 cents in profit for every dollar it collects.

The Importance of Net Profit Margins

Net profit margin is one of the most important indicators of a business's financial health. It can give a more accurate view of how profitable a business is than its cash flow, and by tracking increases and decreases in its net profit margin, a business can assess whether or not current practices are working. Additionally, because net profit margin is expressed as a percentage rather than a dollar amount, as net profit is, it makes it possible to compare the profitability of two or more businesses regardless of their differences in size. Finally, a business can use its net profit margin to forecast profits based on revenues.

Operating Profit

                    

Operating profit is the profit earned from a firm's normal core business operations. This value does not include any profit earned from the firm's investments, such as earnings from firms in which the company has partial interest, and the before the deductions of applicable interest and taxes owed. Operating profit is calculated using the following formula:

Operating Profit = Operating Revenue - COGS - Operating Expenses - Depreciation and Amortization

BREAKING DOWN 'Operating Profit'

Also referred to as earnings before interest and tax (EBIT), operating profit represents the earning power of the company with regard to revenues generated from ongoing operations. Operating profit serves as an indicator to the business’s potential profitability with all extraneous factors removed from the calculation.

Examples of Exclusions from the Operating Profit Calculation

Income created through the sale of assets, outside of those assets created for the purpose of being sold as part of the core business, are not included in the operating profit figure. Additionally, interest earned through mechanisms such as checking or money market accounts are not included.

While the removal of production costs from overall operating revenue, along with any costs associated with depreciation and amortization, are permitted when determining the operating profit, the calculation does not account for any debt obligations that must be met even if those obligations are directly tied to the company’s ability to maintain normal business operations.

Operating income does not include investment income generated through a partial stake in another company even if the investment income in question is tied directly to the core business operations of the second company. Additionally, the sale of assets such as real estate and production equipment are not included as these sales are not a part of the core operations of the business.

Benefits of Referring to the Operating Profit Figure

Companies may choose to present their operating profit figures, in lieu of their net profit figures, as the net profit of a company contains the effects of interest payments and taxes. In cases where a company has a particularly high debt load, the operating profit may present the company’s financial situation more positively than their net profit reflects.

For investors, examining the operating profit may allow for an easier comparison of businesses that operate within industries with differing tax rates or financial structures as this allows for a more equitable comparison.

Operating Profit and Investment Decisions

While positive operating profit may express the overall profit potential of a business, it does not guarantee the business is not experiencing losses. A company with a high debt load may show a positive operating profit while also having a negative net profit. Additionally, large but extraneous costs are not represented, which can again show a company with a negative net profit as having a positive operating profit.

While the removal of production costs from overall operating revenue, along with any costs associated with depreciation and amortization, are permitted when determining the operating profit, the calculation does not account for any debt obligations that must be met even if those obligations are directly tied to the company’s ability to maintain normal business operations.

Operating income does not include investment income generated through a partial stake in another company even if the investment income in question is tied directly to the core business operations of the second company. Additionally, the sale of assets such as real estate and production equipment are not included as these sales are not a part of the core operations of the business.

Benefits of Referring to the Operating Profit Figure

Companies may choose to present their operating profit figures, in lieu of their net profit figures, as the net profit of a company contains the effects of interest payments and taxes. In cases where a company has a particularly high debt load, the operating profit may present the company’s financial situation more positively than their net profit reflects.

For investors, examining the operating profit may allow for an easier comparison of businesses that operate within industries with differing tax rates or financial structures as this allows for a more equitable comparison.

Operating Profit and Investment Decisions

While positive operating profit may express the overall profit potential of a business, it does not guarantee the business is not experiencing losses. A company with a high debt load may show a positive operating profit while also having a negative net profit. Additionally, large but extraneous costs are not represented, which can again show a company with a negative net profit as having a positive operating profit.

Pretax Profit Margin

                                                                                                                                                     

Pretax profit margin is a company's earnings before tax as a percentage of total sales or revenues. The higher the pretax profit margin, the more profitable the company. The trend of the pretax profit margin is as important as the figure itself, since it provides an indication of which way the company's profitability is headed.

BREAKING DOWN 'Pretax Profit Margin'

Profit is the main goal of for-profit organizations. The goal is to make a profit through growth and to grow every year. As a result, one of the most important roles of the financial and investment analyst is to track and forecast profitability. Financial analysts working inside a company must analyze profitability to learn what the company can do to improve sales. In addition to sales growth, the company can grow profits through cost savings. Indeed, it is the goal of every company to grow sales while reducing expenses. Companies that do this well experience an increase in pretax profit margin.

Taxes are not a function of operations. As such, they are not included in operating expenses. Some analysts view taxes as a necessary cost that should not be considered when analyzing the performance of the company. That is, a company can manipulate the amount it pays in taxes, but it is not the goal of operations. Additionally, at times, tax expense can be larger than it has been in previous years due a tax penalty. Likewise, at times, tax expense may be much lower than it has been in previous years due a tax credit. In this case, analysts may be able to decrease earnings volatility by calculating pretax margin.

Pretax Margin Example

Pretax profit margin is calculated by deducting all expenses from sales except for taxes, and then dividing by sales. It can also be calculated by adding taxes back to net income or by dividing net income by '1 minus the effective tax-rate,' and then dividing by sales.

For example, suppose that company A has gross profit of $100,000, operating expenses of $50,000 and interest expense of $10,000, with sales of $500,000. Earnings before taxes are calculated by subtracting operating expense and interest expense from gross profit. The calculation is $100,000 minus $50,000 minus $10,000, or $40,000. So pretax earnings are $40,000 and total sales are $500,000 for the given fiscal year. Pretax margin is calculated by dividing pretax earnings by sales, which is $40,000 divided by $500,000, or 8%. The pretax profit margin enables profitability to be compared across companies with significant differences in size and scale. Company B, which has $750,000 in sales and $50,000 in pretax earnings, may have higher profitability than company A in dollar terms, but has a lower pretax profit margin of 6%.

Business Model

                                                             

A business model is the way in which a company generates revenue and makes a profit from company operations. Analysts use the metric gross profit as a way to compare the efficiency and effectiveness of a firm's business model. Gross profit is calculated by subtracting the cost of goods sold from revenues.

BREAKING DOWN 'Business Model'

During the dotcom boom analysts went in search of net income. The internet is a disruptive technology with the ability to revolutionize certain industries, but where was the cash flow? When analysts couldn't find the cash flow, they settled for the business model to legitimize the industry. Instead of looking at net income, calculated as gross profit minus operating expenses, analysts concentrated on gross profit. If the gross profit was high enough, analysts theorized, the cash flow would come.

Business Model Components

The two primary levers of a company's business model are pricing and costs. A company can raise prices and it can find inventory at reduced costs. Both actions increase gross profit. Gross profit is often considered the first line of profitability because it only considers costs, not expenses. It focuses strictly on the way in which a company does business, not the efficiency of management. Investors that focus on business models are leaving room for an ineffective management team. They believe the best business models can run themselves.

Comparing Business Models

As an example, assume there are two companies and both companies rent movies. Prior to the internet, both companies made $5 million in revenues and the total cost of inventory sold was $4 million. Gross profit is calculated as $5 million minus $4 million, or $1 million. Gross profit margin is calculated as gross profit divided by revenues, or 20%.

After the advent of the internet, company B decides to offer movies online instead of renting or selling a physical copy. This change disrupts the business model in a positive way. The licensing fees do not change, but the cost of holding inventory is down considerably. In fact, the change reduces storage and distribution costs by $2 million. The new gross profit for the company is $5 million minus $2 million, or $3 million. The new gross profit margin is 60%, which is much higher than 20%.

Company B isn't making more in sales, but it figured out a way to revolutionize its business model, which greatly reduces costs. Managers at company B have an additional 40% more in margin to play with than managers at company A. Managers at company A have little room for error.

After-Tax Profit Margin

                    

After-tax profit margin is a financial performance ratio, calculated by dividing net profit after taxes by revenue. A company's after-tax profit margin is important because it tells investors the percentage of money a company actually earns per dollar of revenue. For example, if someone owns a store and his net profit or net income after taxes is $100,000, and his net sales are $200,000, he has a 50% profit margin after taxes.

BREAKING DOWN 'After-Tax Profit Margin'

Often, a company's earnings don't tell the entire story. The amount of profit can increase, but that doesn't mean the company's profit margin is improving. For example, a company's sales could increase, but if costs also rise, that leads to a lower profit margin than the company had when it had lower profits. This is an indication that the company needs to better control its costs.

How Do After-Tax Profit Margins Work?

To illustrate, imagine that one year a company has $200,000 in net profit after taxes after collecting $300,000 in revenue, resulting in an after-tax profit margin of 66%. The following year, the company's net profit increases to $300,000, and it has $500,000 in revenue, yielding an after-tax profit margin of 60%. Although the company took in $200,000 more in revenue and had a $100,000 increase in profits, its margin shrunk. This means the company is making more money but also spending more for every dollar it earns.

In the first case, the company earns 66 cents in profit for every dollar it receives in revenue, but in the second case, it only earns 60 cents of profit for every dollar of revenue. To understand after-tax profit margins, you have to understand both net revenue and net profit.

What Is Net Revenue?

Net revenue, a key element of calculating after-tax profit revenue, consists of all of the money a company has taken in over a set period of time. It takes into account all of the revenue received by a company minus any returns or chargebacks. For a company that only sells products and services, net revenue is the same as net sales. However, many companies have multiple revenue streams, including interest, royalties, fees and donations.

What Is Net Profit?

Net profit, the other important figure when calculating after-tax profit margins, consists of all of the revenue a company has received minus the cost of goods sold and operating expenses. For example, imagine your company collects $70,000 in revenue, spends $20,000 on inventory, and then spends an additional $20,000 on wages, rent, utilities and taxes. In this case, your net profit is $30,000.

Gross Margin

                    

Gross margin is a company's total sales revenue minus its cost of goods sold (COGS), divided by total sales revenue, expressed as a percentage. The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services it sells. The higher the percentage, the more the company retains on each dollar of sales, to service its other costs and debt obligations.

BREAKING DOWN 'Gross Margin'

The gross margin number represents the portion of each dollar of revenue that the company retains as gross profit. For example, if a company's gross margin for the most recent quarter is 35%, that means it retains $0.35 from each dollar of revenue generated. It spends the remainder on COGS. As COGS have already been taken into account, the remaining funds can be put toward paying off debts, general and administrative expenses, interest expenses and distributions to shareholders.

How to Calculate Gross Margin

To illustrate how to calculate gross margin, imagine a business collects $200,000 in sales revenue. It spends $20,000 on manufacturing supplies and $80,000 on labor costs. After subtracting its COGS, it has $100,000 in gross profits. Dividing gross profits by revenue equals 0.5, and when multiplied by 100, that becomes 50%.

Importance of Gross Margin

Companies use gross margin to measure how their production costs relate to their revenues. For example, if a company's gross margin is falling, it may look for processes that allow it to cut labor costs or for suppliers who offer lower costs on materials. Alternatively, it may decide to increase prices to boost revenue.

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Businesses may also use gross margins to forecast how much money they have left over from sales to cover other operating expenses. For example, if a company has a 50% gross margin, it knows that it only has $0.50 of each revenue dollar collected to devote to operating expenses. Gross profit margins can also be used to measure company efficiency or to compare two companies of different sizes to each other.

Difference Between Gross Margin and Net Margin

While gross margin only looks at the relationship between revenue and COGS, net profit margin takes all of a business's expenses into account. When calculating net profit margins, businesses subtract their COGS as well as ancillary expenses, such as product distribution, wages for sales reps, miscellaneous operating expenses and tax. Gross margin, also called gross profit margin, helps a company assess the profitability of its manufacturing activities, while net profit margin helps the company assess its overall profitability.

For more information, check out A Look At Corporate Profit Margins.

Accounting Profit

 

Accounting profit is a company's total earnings, calculated according to generally accepted accounting principles (GAAP). It includes the explicit costs of doing business, such as operating expenses, depreciation, interest and taxes.

Accounting profit differs from economic profit in that accounting profit only represents the monetary expenses a firm pays and the monetary revenue it receives; it tends to be higher than economic profit since it omits certain implicit costs, such as opportunity costs.

BREAKING DOWN 'Accounting Profit'

Accounting profit can be thought of as bookkeeping profit. It is the net income earned by a company after subtracting all dollar costs from its total revenue. Accounting profit is derived by preparing and analyzing a company's income statement.

How to Calculate Accounting Profit

For example, a company operates in the manufacturing industry and sells widgets for $5. It sells 2,000 widgets in January for a total monthly revenue of $10,000. This is the first number entered into its income statement. The cost of goods sold (COGS) is then subtracted from revenue to arrive at gross revenue. If it costs $1 to produce a widget, the company's COGS would be $2,000, and its gross revenue would be $8,000, or ($10,000 - $2,000).

After calculating the company's gross revenue, all operating costs are subtracted to arrive at the company's operating profit, or earnings before interest, taxes, depreciation and amortization (EBITDA). If the company's only overhead was a monthly employee expense of $5,000, its operating profit would be $3,000, or ($8,000 - $5,000). Once a company derives its operating profit, it then assesses all non-operating expenses, such as interest, depreciation, amortization and taxes.

In this example, the company has no debt but has depreciating assets at a straight line depreciation of $1,000 a month. It also has a corporate tax rate of 35%. The depreciation amount is first subtracted to arrive at the company's earnings before taxes (EBT) of $1,000, or ($2,000 - $1,000). Corporate taxes are then assessed at $350, to give the company an accounting profit of $650, calculated as ($1,000 - ($1,000 * 0.35).

Difference Between Accounting Profit and Economic Profit

Accounting profit only deals with explicit costs that require direct payment. Economic profit, on the other hand, includes implicit costs, which are the various opportunity costs a company incurs when allocating resources elsewhere.

For example, if a person invests $100,000 to start a business and earned $120,000 in profit, his accounting profit would be $20,000. Economic profit, however, would add implicit costs, such as the opportunity cost of $50,000, which represents the salary he would have earned if he kept his day job. As such, the business owner would have an economic loss of $30,000 ($120,000 - $100,000 - $50,000).

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