IT Financials Glossary

Bottom line

Posted in Financial statements by mgentle on August 26, 2010

Bottom line: the last line of the P&L or Income Statement, which represents net income – ie, sales minus total costs.

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Cashflow

Posted in Financial statements by mgentle on August 26, 2010

Cashflow: the difference between income and expenses. Even if revenue and profits are up, what ultimately counts in the short term is a positive cashflow – ie, money in the bank – to pay employee salaries and vendor invoices. Hence the adage “Turnover is vanity, profit is sanity, cashflow is king”.

EBITDA

Posted in Financial statements by mgentle on August 26, 2010

EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization. This represents the first part of the P&L (Profit & Loss) or Income Statement.

In plain English, EBITDA is operating profit, which is sales minus operating costs – ie, the day-to-day running costs like sales, marketing and administration. But plain English doesn’t help the non-specialist to understand what the remaining costs are, and that’s where EBITDA comes in:

Sales (top line)

– operating costs

EBITDA (operating profit)

Depreciation

Amortization

EBIT (operating income)

– Interest

EBT (earnings before taxes)

– Taxes

Net Income (bottom line)

So, you might ask, why bother with EBITDA? Why not just go straight to the net income at the bottom line? The main reason is to be able to compare the performance of companies in different sectors: because some industries are more capital-intensive than others, subtracting depreciation expenses would distort comparisons. EBITDA is therefore only useful for companies with large amounts of fixed assets, which generate large depreciation charges (like telcos or manufacturing companies).

Finally, because EBITDA was often misunderstood by investors before the dot-bomb crash in 2001 as representing cashflow – a misconception that companies didn’t exactly go out of their way to correct – EBITDA also became known as Earnings Before I Trick Dumb Auditors!

Income statement

Posted in Financial statements by mgentle on August 26, 2010

Income statement: a company financial statement that shows the difference between revenue and costs – in other words, income. Also known as the P&L. The income statement shows the financial performance of the company, in other words, whether it made or lost money over a specific period.

Note that the income statement represents profit and loss over a specific period (usually a month), unlike the balance sheet, which is a snapshot of the company’s value at a point in time.

An analogy would be one’s personal income statement, which would list one’s revenue (salary and other earnings) and expenses (car payments, restaurant bills, alimony …).

The most common format of the income statement in the corporate world is EBITDA.

P&L (Profit and Loss)

Posted in Financial statements by mgentle on August 26, 2010

P&L (Profit and Loss): see Income Statement.

Top line

Posted in Financial statements by mgentle on August 26, 2010

Top line: the first line of the P&L or Income Statement, which is sales or revenue.