Profit versus loss: a guide to the company's bottom line

Have you set up a business and want to learn more about how to calculate your profit and loss, which types of profit and loss you can evaluate and how to draw on them in the future? Here is an overview of the most important profitability indicators.

Why pay attention to the economic result?

The profit and loss statement tells you about the success of the economic activity of the company. It is worth monitoring for several reasons:

• Financial stability: You can see how the company's financial health is doing.
• Decision-making and planning: Look at it in situations where decisions are being made about the company's future, such as major investments, hiring employees, merging departments or multiple companies, or dissolving the company.
• Investment decision-making: The bottom line is an important indicator for investors who are deciding whether a company can provide them with an adequate return on their investment.
• Supplier and business relationships: It is also of interest to your suppliers and business partners. It will help them to assess whether you are able to pay your obligations.
• Legal obligation: It is compulsory for business owners to calculate the profit and loss account every year as part of their financial statements. It is also used to calculate corporation tax.

How to determine the profit and loss account?

The profit and loss account, which, like the balance sheet and cash flow, is a compulsory part of the financial statements, helps you to find it. It provides an overview of all the costs and revenues incurred or earned by the company. By comparing them, you can see the profit or loss.

Have you made a profit? Invest in improving and streamlining production or sales, or pay yourself out of the company (remember, however, that there are rules for paying out a share of profits). Is your profit or loss a loss? Analyse the cause of the loss and avoid repeating past mistakes.

What are revenues and expenses?

Revenues are usually sales of products, goods, services or assets, but also include, for example, production completions or exchange rate gains. They are the outputs of a business.

Costs, on the other hand, represent the inputs of a business, e.g. the cost of renting premises and equipment, energy, employee wages, material consumption, etc. They are usually associated with an outflow of assets or an incurrence of a liability.

Only tax-deductible income and expenses need to be included for income tax purposes. You can only "tax" expenses if they are demonstrably related to your business. Certain income and expenses are not tax deductible (e.g. donations, entertainment costs or valuation allowances) and are therefore not subject to corporation tax.

Which types of profit can you expect to encounter?

EBT and EAT

Gross profit or EBT(Earnings Before Taxes), otherwise known as accounting profit, is profit before tax. It allows you to assess operational efficiency without the tax impact. EBT is used to calculate various financial ratios (such as return on sales - ROS) or for planning and decision making by management.

After taxes, EBT yields net income or EAT(Earnings After Taxes). EAT reveals the financial health of the company. It provides a clear picture of its profitability after taking into account all tax liabilities. It is used, for example, by banks, investors, analysts and suppliers.

EBIT and EBITDA

In order to determine the correct amount of profit, you must also take into account interest and depreciation. EBIT(Earnings Before Interest and Taxes) is the company's earnings before interest and taxes. This indicator assesses the company's performance and can be used, for example, to compare divisions. It is not affected by the method of financing (loans, investments) or the tax burden.

The last type of economic result is EBITDA(Earnings Before Interest, Taxes, Depreciation and Amortization). This is earnings before interest, taxes, depreciation and amortisation. EBITDA is one of the most widely used indicators for assessing a company's profitability. It is mainly used for international comparisons of companies as it excludes tax and interest charges as well as depreciation and amortization (these items have different rules in each country).

Get the most out of your profit and loss!

Profit and loss is an important indicator of the financial performance of companies. You can use it in a variety of situations, including investment decisions or corporate planning. So take the time to analyse it thoroughly and streamline your business operations.

If you need advice not only on the profit and loss, do not hesitate to contact us. We are a reliable partner for bookkeeping and will take care of all accounting duties for you, including profit and loss statements.