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Chapter 15: The Bottom Line

The familiar phrase "the bottom line," often used synonymously with the conclusion or the underlying truth, is actually taken from the standard Income Statement in accounting, which subtracts costs and expenses from sales and shows profits as the bottom line of the statement.

The Profit and Loss Statement

The Income Statement is the same as the Profit and Loss statement. You'll also find them called "pro forma," meaning projected, as in "pro forma income" or "pro forma profit and loss." The pro forma income is the same as a standard income statement, except that the standard statement shows real results from the past, while a pro forma statement is projecting the future.

Now that you have projected sales and cost of sales (Forecasting: Forecast Your Sales), personnel expenses (Tell Your Story: Management Team), and your operating expenses estimates (Forecasting: Expense Budget) it is time to compare your expenses to your sales.

The following illustration shows a simple income statement. This example doesn't divide operating expenses into categories. The format and math starts with sales at the top.

Standard Profit and Loss Statement

This is a partial graphic, showing only three months of a 12-month table.

First, subtract cost of sales from sales. This gives you gross margin, an important ratio for comparisons and analysis. Acceptable gross margin levels depend on the industry. According to the 2005 Industry Profile Analysis from Integra Information, an average shoe store has a gross margin of 47 percent. A hat manufacturer has a gross margin of 37 percent, and a grocery store about 18 percent. Then subtract expenses to calculate profits or losses.


Copyright © Timothy J. Berry, 2006. All rights reserved.