“Business By the Numbers – Part 1” discussed the importance of tracking your business by using numbers from your balance sheet to create business ratios to gather key information as to the health of your business on the specific date from which the balance sheet was obtained.
The next set of ratios are Profit and Loss Ratios drawn from your company Profit and Loss statement. Again, we’ll use information about profit and loss ratios from the Vistage* “Formulas for Success” publication.
“The P&L statement focuses on revenues, expenses and net income (or loss) over a defined period of time. It measures the company’s ability to turn sales/revenues into profits, a key ingredient to long-term success.
Gross Profit measures how much money you have left after subtracting the Cost of Goods Sold to cover all other expenses.
Gross Profit = Revenues – Cost of Goods Sold
Net Operating Profit (EBITDA)
Represents how much money (before interest, depreciation, taxes, and amortization) you have left after all operating expenses are taken out. Some people refer to this as EBITDA (earnings before interest, taxes, depreciation and amortization).
Net Operating Profit = Gross Profit – Selling, General and Administrative Expenses
This measures how much money is left after all costs and expenses are paid.
Net Profit = Net Operating Profit – Interest – Other Expenses – Taxes”
Business By the Numbers Part 3 will feature Operating Ratios.
*About Vistage (from Vistage.com): Since 1957, Vistage has been bringing together successful CEOs, executives and business owners into private peer advisory groups guided by expert executive coaches, known as Vistage Chairs. This assembly of peers & expert leaders makes up Vistage Worldwide, an executive coaching organization.
From the beginning, our coaching Chairs have been at the heart of what makes the Vistage experience so powerful for so many members. Vistage Chairs are a distinguished group of business leaders who come to us from a wide range of industries. Some have owned businesses, many have been CEOs of domestic and international companies, and all are united by a desire to share their insight and expertise to educate other business leaders in their communities through executive business coaching.
About the Author
My name is Jim and people usually call me Jim. Sometimes I’m called James, usually at a doctor’s office. My favorite season is Summer because I like warm, sunny weather. I also like the colors of Autumn. My favorite hobby now is reading, but in the past I spent a great deal of time with my coin collection and drawing and painting pictures. My favorite sport is baseball and the Yankees are my team. I coached baseball and softball for nearly twenty years with my three children. My favorite activity is going out to dinner, throw in a little rock music from the 60’s and early 70’s and it’s a good night. My favorite quotes: “If you think you can do a thing or think you can't do a thing, you're right.” - Henry Ford. “I have not failed. I've just found 10,000 ways that won't work.” - Thomas A. Edison. “Opportunity is missed by most people because it is dressed in overalls and looks like work.” - Thomas A. Edison.More Content by Jim D'Amico