Professional Documents
Culture Documents
As an entrepreneur, it is OK if you do not know how to prepare the financial statements. But the
minimum skill that an entrepreneur MUST have is that he /she can read an Income Statement, a Balance
Sheet, and a Cash Flow Statement, and able to make any business decision from the figures stated in the
statements.
Profit isnt the same as Cash. (Profit Cash)
Net Profit Before Interest and Taxes (also known as Earning Before Interest & Taxes @ EBIT) = Gross
Profit minus Operating Expenses (including depreciation). In other words, it shows the profit made from
running the business. [Formula : EBIT = GP - OE]
Net Profit After Taxes (also known as Earning After Tax) = Net Profit Before Interest and Taxes minus
Interest and Taxes. It shows what left after all costs and all expenses are excluded from revenue. [Formula :
Net Profit = EBIT - (Interest + Taxes)]
Owner Financing
Finance business using entrepreneurs own money e.g. own saving, take a second mortgage out on the
entrepreneurs own houses. This entrepreneurs contribution of cash can be structured as equity
investment in the business (hence will increase the companys paid up capital), or just as loan from the
entrepreneur to the business.
2)
3)
Debt Financing
Lending money from financial institutions, e.g. banks, or agencies that provides financial assistance
such as MARA, TEKUN, etc. Banks wont normally lend money to start-up businesses, but they will
often lend to a start-up entrepreneur provided that the entrepreneurs personal finances are healthy
enough to ensure repayment of the loan whatever fate of the business. Banks who lend money to the
entrepreneur are NOT part of owners of the business and ARE NOT entitled to a say in major decisions.
But the entrepreneur (as the borrower) do have to pay them (the banks) back on the agreed-upon terms. If
the entrepreneur fails to do so, the banks are likely to have legal claim on the business assets.
A)
Cost : The costs and expenses appears in Income Statement (or P&L). Cost and Expenses are those
expenditures incurred in generating the sales recorded during the period, even though the cheque
has not signed yet.
PURPOSES OF INCOME STATEMENT
To measure whether the products or services that a company provides/sold are profitable or not.
To give indicator for the Managements decision (or Sales Manager) on whether or not he can give
discounts and how much discount to give (i.e. how much profit the business is willing to let go).
To assist HR Manager in deciding whether or not he can recruit new staff and which group of staff
need to be recruited (e.g. support, sales, etc.) based on the profitability.
Profit in Income Statement is not reflect real money because revenue is recognized when a product
or service is delivered, NOT when the price is paid. You can be making money as shown by the
income statement, but you may not be generating cash fast enough to pay your bills. This is one
reason why even a highly profitable company may find that its cash is tight.
FORMULA FOR INCOME STATEMENT
Sales
Less: Cost of Good Sold (COGS)
XX
(XX)
GROSS PROFIT
Less Expenses
XX
(XX)
XX
(XX)
XX
***************************************************************
EXERCISE
Given:
Total liabilities
Total owner equity
Total sales
Total expenses
Total COGS
RM15,100.00
RM10,000.00
RM 8,000.00
RM 3,500.00
RM 3,200.00
Calculate:
a) how much the Gross Profit?
b) how much the Net Profit?
B)
RM15,100.00
RM10,000.00
RM 8,000.00
RM 3,500.00
RM 3,200.00