When people talk about ‘profits’, do they mean the same as ‘earnings’ and what’s this ‘EBITDA’ thing?
The truth is that they are all ways of describing the performance of an organisation.
‘Profit’ is a word that means the amount that is left from income after deducting expenses. But which expenses? That’s a good question. Profit is a loose term. We have different types of profit:
- Gross profit: that’s profit after deducting the direct costs, that’s the cost that we have to incur to earn the income such as the cost of fuel and a driver for a bus company.
- Operating profit: that’s the profit after deducting the direct costs and the indirect (or overhead) costs such as the cost of running the administrative team or the rent of the offices.
- Net profit: that’s the profit after all the costs, direct, indirect, interest and tax. This is the profit that’s left over for the owners of the business.
‘Earnings’ then is a term used to describe the amount that the owners of the business have made from the organisation. So that’s effectively the same as net profit.
Lastly we have the newcomer to this world of profit terminology, EBITDA. This is the operating profit before the costs of depreciation are deducted. It is thought by some academics to be a better measure of the performance and cash generating ability of an organisation that the other measures and is very widely used by business and public sector organisations across the world.
If you would like to know more about Profit, earnings and EBITDA, contact us and we can deliver one of our course at your organisation or you can buy or Finance for Beginners on-line learning.