In the article on how to measure your company’s performance, we learn in a relaxed way about the structure of your company’s Income Statement (DRE).
We will now see, step by step, how each piece of information in the DRE can help us understand our business.
1. Total sales value
Every company, whether it is a retailer, an industry or a service provider, aims to sell what it produces. Without sales, your company will hardly survive.
But often the total sales value, because it involves large amounts, is what confuses entrepreneurs.
To avoid problems in your company, let’s adopt a rule once and for all: this value is not the company’s profit and must be managed responsibly!
It is the amount that will be used to pay all of the company’s bills .
2. Cost of what was sold
The product purchased from the supplier, the raw material for manufacturing, the labor of the service provider: all of these items are examples of a company’s costs.
Knowing how much it costs to produce what you sell is essential for your business and has already been the subject of another article here on the blog. The cost will help you define, for example, how much you should charge for what you sell .
By subtracting the cost from the total sales, you will already know what your company’s gross profit is.
3. Gross Profit
Let’s say this is the “first level” to see if your business has potential. Gross profit provides the answer to the question: is it worth producing what I sell?
Not having a gross profit means that what you sell is not worth making!
Using this information, you can look for alternatives, such as reducing production costs or adjusting your sales price.
If your gross profit is positive, you can “move one more space” in our game and subtract operating expenses from this amount.
4. Operating Expenses
Marketing expenses, sales commissions, administrative professionals’ salaries and other expenses to support the company’s operations are part of this sum.
Operating expenses answer the question: how much do I spend to sell what I make?
The lower this value, the better. Look for alternatives to reduce operating expenses and maintain the same sales volume. If you can achieve this, you are certainly optimizing your investment.
Subtracting operating expenses from gross profit will give you your Operating Income .
5. Operating Revenue
Operating Revenue is the thermometer of the productivity and efficiency of your company’s operations.
If it is positive, it means that your entire process, from purchasing from suppliers to production and sales, is paying off. The higher the operating revenue, the more efficient your company is in production and wealth generation.
If there is no operating revenue, you need to reevaluate all stages of your purchasing, production and sales process and identify where you can improve and make your business capable of generating profit. After all, a company without profit has no future!
It’s important to remember that operating income is not your company’s profit either .
Many businesses start by borrowing money to start their activities, so operating income must be sufficient to generate profit and pay any interest expenses on loans .
6. Interest Expenses
If your company has no debts from loans or financing, congratulations! However, if your company has incurred debts, make sure that payments are made on time to avoid expenses with fines and interest .
Debts are obligations that your company has with its creditors (those who gave you credit) and, like all obligations, they must be paid . Delaying financial commitments can cause your company to spend money that could be invested in its growth.
Subtracting interest expenses from operating income will give you your Profit Before Taxes .
7. Profit before taxes
Profit before tax shows your company’s ability to generate revenue from what it produces and, in the case of debt, its ability to honor the commitments made.
It is possible to identify, for example, whether your company is prepared to take on more debt and how much paying interest interferes with its ability to generate profit.
Profit before taxes is not yet the money available to be divided among the partners.
To finish our “game”, we will need to move on to the next house and pay our Income Tax .
8. Income Tax
When we open our own business we have to be aware that when we start, we are accepting the “rules of the game”. Taxes are part of the rules of the game .
Many entrepreneurs complain about the high tax burden imposed by the government. In fact, the amount of taxes paid by companies is enormous, but that does not give us the right to evade taxes and circumvent the rules of the game.
It is up to the entrepreneurial community to demand results and transparency about where tax money is being spent. Complaining and evading taxes will not help at all.
Subtracting the amount of taxes from the profit before taxes will give you your Net Income .
9. Net Revenue
Yes! This is the amount that can be reinvested in the company or divided among the partners!
Net income is the best way to measure a company’s profitability in relation to the investments made.
Owners can compare the money invested and the profit generated from this money, and thus assess whether it is worth investing in the business.
Tip:
It is very important to understand the step-by-step process of generating profit.
Now take advantage and collect data and prepare your company’s income statement . See if it is being efficient and where it can be improved.