So, let’s talk business jargon.
People get confused all the time between gross profit, net profit, EBITDA and what that stands for, and it’s something I get asked about an awful lot. So what I thought I’d do is I would try to bust a bit of the jargon and explain to you some of the key words and what they mean within your profit and loss.
There’s different areas of your business but profit and loss is probably the main one that you need to be completely clued up on, so that’s what we’re going to start with.
So first of all – turnover.
It’s sometimes referred to as revenue, income or top line. Basically, your turnover is all of the sales that your business makes. If you sell all of your goods or your services, all of the money that you collect in a given period is your turnover.
Now, the next thing that a company would look at is gross profit.
Between your turnover and your gross profit are all of what we call the direct costs. So the costs that are directly associated with making those sales.
So, if you are selling products, the direct costs are the physical cost of the goods. For example, you might sell a hundred thousand pounds worth of product but it might have cost you fifty thousand to buy all of that product so your gross profit is fifty thousand pounds. OK,
Sometimes companies talk about gross margin.
Gross margin is the percentage that your gross profit is as a percentage of your turnover. So in the case that I just gave you £50,000 of cost, £50,000 of profit to make up your £100,000 turnover, then your margin is 50%. If you had made £100,000 of the turnover and your goods had cost you £30,000, your gross profit would be £70,000, your gross profit margin would be 70 % because it’s the percentage of your turnover.
The next one down is net profit.
Now, your net profit is your gross profit less your overheads. So overheads are the generic costs that don’t fluctuate to an extent, but are fairly static based on what your turnover is. These are things like your staff costs, your rent and rate, business insurance, costs that aren’t going to fluctuate depending on what your sales are.
All of your overheads are declared after your gross profit and your net profit is your gross profit less your overheads. This is the profit that you are left with the end of the day.
Now, you’ll have heard the saying turnover is vanity, profit is sanity. That’s because in any business if you aren’t making profit, then that’s a problem. You’ve got your turnover, we’re making our top line profit but then actually what is our bottom line profit.
You’ll hear us quite often on the Den talking about EBITDA. EBITDA is your earnings before interest and taxation and depreciation So your EBITDA is another word for saying your bottom line profit. When you’re a business you pay tax based on your profitability so your EBITDAs, your earnings before tax is basically the last line of profit that you’ve made, that’s what you would pay your tax on so that when you’re left at the end, those are your earnings after the tax you’ve paid.
So remember, you’ve got your turnover then we have all of our direct costs. That will then give you your gross profit. Once we’ve got our gross profit, we’ve got our indirect costs or our overheads, they come next. Then you’ve got your net profit.
Your net profit is the amount of money that you pay tax on. So your net profit, that bottom line down there is usually referred to as your EBITDA as well. Once you’ve made your net profit, you would then pay your tax and then the bottom line you would have basically what would be in your pocket at the end of the day is your earnings after tax.
Hopefully that explains some of the business jargon that you might hear us talking about and what your different types of profit are and why you need to know the different types of profit!