Let’s break down the important terms you’ll see in a Profit and Loss account:

• Revenue (Sales): The total income generated from selling goods or services before any expenses are deducted.
  • Formula: Revenue=Selling Price per Unit × Number of Units Sold
• Cost of Goods Sold (COGS): The direct costs of producing the goods sold by the business. This includes raw materials and labor costs directly involved in production. For Yohannes, this would be the cost of the solar cooker components. For Selamawit, it would be the cost of purchasing the clean cookstoves and the materials for biofuel briquettes.
• Gross Profit: The profit a company makes after deducting the costs associated with making and selling its products (COGS). This is an important first look at your business’s core profitability.
  • Formula: Gross Profit=Revenue−COGS
• Operating Expenses (OPEX): The regular expenses incurred in running the business, such as rent for your shop/workshop, utilities, marketing, salaries for staff, and administrative costs. It is a sum of all these operating expenses.
• Earnings Before Interest and Tax (EBIT) / Operating Profit: The profit earned from a company’s core business operations, excluding interest and taxes. This shows how well your main business activities are performing.
  • Formula: EBIT=Gross Profit−Operating Expenses
• Net Profit (Net Income): The total profit after all expenses, including taxes and interest, have been deducted from total revenue. This is your “bottom line” – what you truly earned.
  • Formula: Net Profit=Operating Profit−Interest−Taxes
• Interest Expense: The cost incurred by the company for borrowed funds (e.g., loans or credit). If Yohannes takes a loan to buy machinery, the interest he pays on that loan is an interest expense.
• Tax Expense: The amount of money paid as taxes to the government based on the company’s taxable income.
• Depreciation and Amortization: Non-cash expenses that reduce the value of tangible assets (depreciation, like the value of a delivery van decreasing over time) and intangible assets (amortization, like the value of a patent decreasing). You don’t pay cash for these every month, but they represent the wearing out of your assets.
  • Formula for Straight-Line Depreciation: Depreciation Expense=Useful Life of AssetCost of Asset−Salvage Value​
• Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): A measure of a company’s overall financial performance, excluding interest, taxes, depreciation, and amortization. It gives a rough idea of how much cash your business generates from its operations before considering non-cash expenses or financing costs.
  • Formula: EBITDA=Operating Profit (EBIT)+Depreciation+Amortization
• Retained Earnings: The portion of net income that is kept in the company after any dividends are paid out to owners. This money can be reinvested in the business.
  • Formula: Retained Earnings=Beginning Retained Earnings+Net Profit−Dividends