A profit and loss statement is one of the three basic and most common financial statements of any business or company. This statement shows whether the company is profitable or not. It’s a statement of revenue, expenses, profits and losses over a mentioned period of time and is also referred to as income statement or statement of operations. This is prioritized by any investor or banker before investing in any company.
There is often a very obvious question that is asked, i.e. ‘How to manage my investment portfolio?’ The answer to this question is provided by 2 workable agencies- the Asset Management Company and then there are the wealth management advisors.
How to read a Profit and Loss Statement?
It is an easy and fairly simple analysis! Here is an articulated means of understanding and calculating profit and loss and creating the statement.
1. Gross margin- Gross margin is the amount you calculate when subtracting Direct Cost from Revenue.
2. Revenue- It is known as the top line. This is the money accumulated from the sale of a company’s products. This is for a profit earning company. For a non-profit company, revenue comes from the fundraising. The higher the revenue, the better is the company's infrastructure.
3. Direct Cost- Also known as COGS (cost of goods and services), Direct Cost is the cost incurred by a company in the process of making a product of delivering its services. Rent or payroll is not included here rather other things like cost of buying products from manufacturer etc are.
Now, Gross Margin = Revenue - Direct Cost. Gross margin is the amount of money a company is left with to cover all of their other expenses, known as operating expenses.
4. Operating expenses- Operating expenses include all the expenses of a company excluding the direct cost, interest on loans (if any) and taxes paid. It basically includes- rents, salaries and benefits, marketing expenses, research and development expenses and utilities et cetera.
Operating Expenses = Other Expenses - Direct Cost
5. Operating income- It is also known as ‘Earnings before interest, taxes, depreciation, and amortization' (EBITDA). This is calculated by subtracting operating expenses from the gross margin.
Operating Income = Gross Margin - Operating Expenses.
6. Interest- This part calculates the company’s interest on loans (if any issued by the company). This part is paid to the loan issuer and it is exempted from profit.
7. Taxes- Tax is the amount of money taken by the government from the company for the sales done.
8. Depreciation and amortization- Some assets of a company, like vehicles, machines etc. lose their quality and prominence over time. So, this part includes the cost incurred by a company on its assets' depreciation and amortization value.
One solution to “how to manage my investment portfolio? Is the Asset management company. These companies invest their clients' money into securities keeping in mind the financial objectives of their clients. They earn via commissions and fees provided by the clients. AMCs manage mutual funds, hedge funds and pension plans. They provide a number of investment plans which an investor cannot find on his own.
Understanding Net Profit
This is what the actual concern of everyone is, be it the company or the investors. It is the bottom line. After all the above-mentioned process is done, the amount left over is the net profit of the company. If what you are left over with is more than all your expenses incurred then you are in a profit and if it is less than your expenses, then sadly, you’re in a loss and need to do something about it!
Wealth management advisors are exactly what your portfolio needs to make sure that your efforts of earning and saving never go in vain! These are the managers who deliver their advice on the financial matters to their clients. A single wealth management advisor provides a client with financial and investment advice, accounting and tax services, retirement planning, and legal or estate planning. The basic motto to go for a wealth management advisor is that, despite going for a number of advisors on various financial matters, a wealth management advisor, under one set of the fee, provides his service on various sets of an issue of a client as mentioned above.