Must know for HR....Basic understanding of business Finance - Part 5

"The most important thing in life is not to capitalize on your gains. Any fool can do that. The really important thing is to profit from your losses. That requires intelligence; and it makes the difference between a man of sense and a fool" William Bolitho quotes

In my previous post I touched upon Balance sheet and terms used in the document.  Let us understand in details few other Financial documents :-

Profit and Loss Statement – It is also known as Income Statement or P&L, or Statement of Operations. This document lists the company's income (revenues or sales), minus the company's expenses, and it shows the profit or loss over a specific period of time.

Following are the terms used in profit and loss statement :

Net Sales : The total rupee value of all cash or credit sales less returns

Cost of goods sold : For a retail or wholesale business it is the total price paid for the products sold plus the cost of having it delivered in stores during the accounting period. For a manufacturing firm it is the beginning inventory plus purchases delivery cost, material, labour and overhead minus the ending inventory

Profits : There are several terms that represent the profitability of a business and keeping them straight can be confusing. Here's a primer on understanding critical profit numbers:

EBITDA: This acronym stands for earnings before interest, taxes, depreciation and amortization which essentially are a way to make profits look better in comparison with net income. EBITDA is widely used as a way to report earnings for a company, but it can be deceptively optimistic as it doesn't take into account taxes and interest payments.

Gross profit : Also called Gross Margin it is the profit before expenses and taxes have been deducted.. Simply stated, it is net sales minus cost of goods sold. This is how much money you are left with after you have subtracted the direct costs from the selling price of the product or service i.e. income minus direct costs equals gross margin. The higher the margin the better it is, because you need to have enough left over to pay for indirect costs or overheads (like salaries, rent, advertising, telephone, and utilities) and still make money. If you don't, then you are likely not charging enough for your products or services.

Net Profit : The amount left over after deduction of interest, taxes and expenses (The cost of doing business which includes expenses such as wages, telephone, insurance, depreciation, interest, advertisement etc). At times it is specified as net profit before taxes, profit before interest, depreciation and taxes, Net Income, net earnings, current earnings or the bottom line. You arrive at this number by subtracting all the expenses in your business, including taxes, from your revenue. This number is critical as it reveals how much money is left after accounting for business operations. If the number is negative then the company is not profitable and has produced a loss.

Dividend : The portion of company’s net earning paid to shareholder at a specified rate per share.

Retain Earnings : The portion of a company’s net earning not paid to share holders in the form of dividends. Retained earnings are reinvested in the company .

Another key Financial Statement is Cash Flow Statement: A cash flow statement helps you stay on top of how much money came and went through the business for any period of time. This document is critical because it helps you understand why, even if the company appears to be turning a profit, they don't have much money in the bank.

In my next post I will share with you the business importance of the term which you would have quite often used from the start of your academies. Watch out for the space…