Earnings Reports

Written by Patricia Tunstall
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Earnings reports from the accounting department of a company let management know where adjustments must be made in order to maintain a satisfactory EBIT (earnings before interest and income tax). This figure is the foundation of a healthy, well-run business because it indicates there is enough operating profit to cover capital expenditures.

Operating earnings are also referred to as operating profit, or EBIT. All these names imply the importance of controlling costs in addition to making a profit. Any business must strike a balance between costs or expenses and sales revenue. Out-of-control inventory, accounts receivable, or other expenses will eat up profit unless management can find ways to compensate.

Improving Cash Flow

If earnings reports indicate a need for better profit margin, management must decide which route to take to accomplish that goal. Profit is crucial, of course, but increasing profit and increasing cash flow is even better. Strengthening sales volume will increase profit, but it also necessitates expanding inventory, which negatively affects cash flow.

A more effective way is to increase profit margin by raising the sale price or reducing the costs involved in making the product. Inventory is not adversely affected, and cash flow is enhanced. Accounting reports should help managers see clearly that one path has better financial consequences than the other.

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