Finance Metrics Flashcards
Profit & Loss Statement
Items in Profit and Loss Statement
Revenues
The money a company makes from the sales of its products and services.
Cost of Goods Sold (COGS) or Cost of Sales: These are the direct costs the company incurs to develop the product or service being sold.
Gross Profit
The difference between the revenue earned and the costs summarized in COGS. Gross Profit = Revenue - COGS
Selling, General and Administrative expenses (SGAs)
Includes the following expenses: Marketing, sale commissions, Salaries for office staff Supplies and computer hardware
Note: Some companies list total operating expenses separately from SGAS while others treat them as synonymous with SGAS.
Operating expenses
Expenses incurred outside of direct manufacturing costs: Overhead costs, Legal, Rent, Utilities, Taxes, Interest, R&D expenses.
Total Operating Expenses
Sum of SGAs and Operating expensesTotal Operating Expenses = SGAs + Operating Expenses
Operating Income
The difference between Gross profit and Total operating expenses
Operating Income = Gross Profit - Total Operating Expenses
Note: Operating Income is also referred to as Earnings Before Interest and Tax (EBIT)
Net Income
Subtracting the Interest and Tax from Operating Income gives the Net Income
Net Income = Operating Income - (Interest and Taxes)
Gross Margin
A statement about the overall profitability of the company. Gross Margin is an indicator of whether the generated revenues will cover operating expenses after accounting for COGS.
Calculation
Gross Margin = (Total Sales Revenue - Cost of Goods Sold) / Total Sales Revenue
which is the same as Gross Profit / Total Sales Revenue
This metric identifies the revenue that remains after accounting for direct costs of production. Gross Profit/ Revenue
Recap:
Gross Margin = (Total Sales Revenue - Cost of Goods Sold) / Total Sales Revenue
Can also be represented in percentage by multiplying it by 100
Gross Margin (in %) = [ (Total Sales Revenue - Cost of Goods Sold) / Total Sales Revenue]*100
Gross Margin tells business executives what percentage of each revenue dollar is available to cover operating expenses after the COGS have been accounted for.
Contribution Margin
Contribution Margin tells us the amount of revenue that covers the variable costs and is now available to cover the fixed costs and generate profits. Companies use it to identify which product or product line is contributing the most to the profit margin. It also helps determine the break even point where the pricing will cover fixed overhead costs and leave enough for profits too.
Fixed costs are also called sunk costs. A good caution to keep in mind is that fixed or sunk costs can increase (for e.g., unexpected rent increases, machinery replacement costs), which is why operational managers prefer the term sunk costs. These sunk costs can prove tricky, because a small increment when taken in bulk, can turn out to be catastrophic for companies, especially start-ups.
Contribution Margin Calculation -
Calculation
Total Contribution Margin = Total Sales Revenue - Total Variable Cost
Contribution Margin Per Unit: Total Contribution Margin / Number of Units Sold
Fixed Costs - Fixed costs: Expenses incurred on a regular basis, such as monthly rent, utilities, and employee salaries.
Variable Costs - Variable costs: Expenses that move up and down in response to production output.
Contribution Margin Per Unit
Gross Margin - Total Sales Revenue – COGS
Gross Profit - Total Operating Expenses
Contribution Margin Per Unit - (Total Sales Revenue - Variable Costs) / Number of Goods Sold
Gross Profit /Total Sales Revenue
Cost of Goods Sold (COGS) or Cost of Sales
These are the direct costs the company incurs to develop the product or service being sold.
