Operating Earnings

Operating earnings are found in the internal report for management's eyes only. These earnings, or profit, are broken down into sections of statistics that should not be divulged to competitors. Meant to lay out exactly how the company made its profit last year, this earnings section pinpoints the crucial relationship between sales and costs.

In this report, variable and fixed operating expenses are subtracted from sales revenue, as is the cost of goods sold. The result is operating profit, or, earnings before interest and income tax (EBIT). A good profit is crucial to the company, for it means the company is making enough sales to cover its capital outlay.

Sales and Costs

Operating earnings are not bottom line profit. Good earnings are, however, an indication that the company is making sales and controlling costs. These two factors go hand-in-hand in producing bottom line profit. An increase in sales is, of course, the goal of any business, but if expenses associated with making those sales are out of control, profit suffers.

Monitoring sales activity--price and volume, and associated costs--is calculated to reveal profit. The result does not indicate whether decisions regarding marketing, for instance, were effective, but provides a clinical look at the fundamentals that constitute operating profit. This approach to financial analysis will disclose the critical relationship between sales and costs.