Pre-tax profit is calculated by subtracting a company’s expenses from its income without the consideration of corporate income taxes. Fixed expenses, such as rent, repayments of long-term debt and insurance, variable expenses, such as wages, advertising and office expenses, as well as non-cash expenses such as depreciation and amortisation are all included in the calculation of pre-tax profit. Business owners often use pre-tax profit to determine if monies are available for additional officer’s compensation and shareholder distributions.
Calculate gross profit by subtracting the cost of goods sold from income. Cost of goods sold consists of expenses such as materials, subcontractors, direct labour and other job costs directly related to the end product. Cost of goods sold is not relevant in professional or service-related businesses.
Subtract the company’s selling, general and administrative expenses from the calculated gross profit. Selling, general and administrative expenses include rent, utilities, office expenses, officer and office payroll and related payroll taxes. The resulting value represents EBITDA, or earnings before interest expense, taxes, depreciation and amortisation.
Subtract interest expense, depreciation and amortisation from EBITDA previously calculated to arrive at earnings before taxes, or pre-tax profit.
Gross profit and pre-tax profit can be represented as a percentage of revenue and compared to industry benchmarks to gauge a company’s performance.
Tips and warnings
- Gross profit and pre-tax profit can be represented as a percentage of revenue and compared to industry benchmarks to gauge a company’s performance.