Pre-Tax Profit and the Bottom Line
Whilst profit before tax is often referred to as the bottom line, that rarely describes the key profit performance of a company over the course of its financial year.
Operating Profit – The Real Bottom Line
What really matters is operating profit. When preparing a business plan, that will be the key feature in your profit and loss forecast.
Operating profit is earned in the normal course of business and nothing else. Earnings not arising from core trading operations such as a net-book profit on the sale of a non-current asset such as of a company car or from income in investments are only applied to pre-tax profits once operating profit has been struck.
Operating profit is the only reliable measure of a company's profit performance over its financial year. The sample profit and loss forecast in Figurewizard shows how all of the steps towards pre-tax and profit after tax are calculated.
Taxable Profit
Corporation tax is not calculated from the pre-tax profit either, that is the job of the taxable profit.
For example, depreciation of fixed assets is replaced by capital allowances. Net book profits or losses on the sale of fixed assets are assessed on their written down tax values instead. That will often turn a a net-book loss on the sale of a fixed asset into a taxable profit.
How this works; illustrated step by step can be seen by going to the Figurewizard sample taxable profit and tax charge forecast.