Understanding Business Profit: 7 Key Profit Metrics

Profit is the most critical measure of a business's success. It helps investors and entrepreneurs evaluate how efficiently a company operates. In this article, we will break down different types of profit using an example of ₹1000 in sales.

1. Sales and Cost of Goods Sold (COGS)

Every business starts with total sales. However, there are costs involved in producing and delivering a product, known as COGS (Cost of Goods Sold).

Sales = ₹1000

COGS = ₹400

Gross Margin = ₹1000 - ₹400 = ₹600

The Gross Margin indicates how much money remains after deducting direct costs.

2. Contribution Margin 1

After Gross Margin, we subtract other costs such as shipping, warehousing, and platform commissions.

Shipping = ₹50

Warehousing = ₹30

Platform Commission = ₹60

Contribution Margin 1 = ₹600 - (₹50 + ₹30 + ₹60) = ₹460

3. Contribution Margin 2

Now, we deduct costs related to marketing and technology.

Marketing = ₹100

Technology = ₹50

Contribution Margin 2 = ₹460 - (₹100 + ₹50) = ₹310

4. EBITDA (Earnings Before Interest, Tax, Depreciation & Amortization)

Next, we subtract fixed costs to arrive at EBITDA.

Fixed Costs = ₹50

EBITDA = ₹310 - ₹50 = ₹260

5. EBIT (Earnings Before Interest & Tax)

To calculate EBIT, we subtract depreciation.

Depreciation = ₹30

EBIT = ₹260 - ₹30 = ₹230

6. PBT (Profit Before Tax)

Before-tax profit is obtained after deducting interest expenses.

Interest = ₹20

PBT = ₹230 - ₹20 = ₹210

7. PAT (Profit After Tax)

Finally, after deducting taxes, we get the company's net profit (PAT - Profit After Tax).

Tax = 30% of ₹210 = ₹63

PAT = ₹210 - ₹63 = ₹147

Conclusion

From ₹1000 in sales, after deducting all expenses, the final profit retained by the company is ₹147. This breakdown highlights how businesses track their profitability at different levels. To increase profits, companies must understand their costs and optimize their operations.

- Author: Prakash Pandey