Following our initial release on balance sheet basics last week, here is the sequel – none other than its sister financial statement, the profit & loss statement.
More commonly known as the Statement of Comprehensive Income these days, the profit and loss statement as a concept, summarises the “profitability” of a company over a period of time, as opposed to a point in time, as in the balance sheet.
How a simple Profit & Loss Statement looks like:
|Revenue||100 – ‘topline’|
|Less:||COGS||(30) – brackets denote negative amount|
|Net Profit Before Tax||40|
|Net Profit After Tax||20 – ‘bottomline’|
From the above, we can see where the commonly used terms ‘topline’ and ‘bottomline’ come from.
The ‘topline’ typically refers to the revenue, before subtracting away the costs/expenses of the company. It gives an idea of how much sales are being made, and is useful as a means to gauge product/service demand and/or the efficiency of the sales/marketing team.
The ‘bottomline’ on the other hand, refers to net profit after tax – what is left after all expenses have been deducted.
What about dividends?
Most of us like the idea of dividends – but it is important to note that dividends are not an expense, although prima facie, they seem to be! Dividends are paid out of retained earnings, which is a balance sheet concept – so do not expect to find the amount of dividends paid out in the P/L statement, if it were drawn up correctly.
How best to utilize the information from the P/L?
It is important to actually compare P/L statements across time periods, and sometimes even across industries – to get a sense of how the company is doing on a relative basis.
For example, Revenue may seem very high for a particular financial year (prima facie, a good thing), but upon closer inspection of the previous 5 years’ P/L statements, you may discover that revenue for the current year was at its lowest in comparison to the other statements!
Here at Joy Management Services, we are pleased to share our insights/expertise on matters relating to the above, if you are keen. Feel free to get in touch!