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Economies around the world witness a combination of different market structures. While there's a lot of competition in most industries, some industries witness just one seller. There exists no competition in such industries as there are virtually no other players. Such market structures are termed as monopolies.

But what exactly is a monopoly and how does it work?

Let's find out.

What is a monopoly?

A monopoly is a market structure that consists of a single seller who has exclusive control over a commodity or service.

The word mono means single or one and the prefix polein finds its roots in Greek, meaning "to sell". Hence, the word monopoly literally translates to single seller.

To understand the concept better, let's break the definition into three key-phrases -

Market structure: A market structure is how a market is organised. It explains the competition in the market and how different players are connected to each other.

Single seller: A single seller is the key characteristic of a monopoly. This means that only a single seller is solely responsible for the production of output of a certain good.

Exclusive control: Exclusive control, in this context, is the power an entity has over the production and selling of the concerned offering.

Characteristics of a monopoly

A monopoly displays characteristics that are different from other market structures. These characteristics are as follows:

Single seller - A single seller has total control over the production, and selling of a specific offering. This also means that the seller has no competition and holds the entire market share of the offering that it deals in.

No close substitutes - The monopolist produces a product or service that has no similar or close substitute.

Barriers to entry - In a monopoly market structure, new firms cannot enter the industry due to barriers like government regulations, contracts, insurmountable costs of production, etc.

Price maker - A monopolist has the power to charge any price for its product of service.

Types of monopoly

There exist several different types of monopolies in an economy. These different types of monopolies are listed below:

Private Monopoly - A private monopoly is one that is owned by an individual or a group of individuals. These monopolies mainly aim for profits.

Public Monopoly - A public monopoly is one that is owned by the government. These monopolies are set up for the welfare of the masses. An example of a public monopoly would be the U. S. Postal Service.

Pure/ Absolute Monopoly - The monopolist controls the entire market supply for its product without facing any form of competition. This is possible because there is absolutely no close or remote substitute available in the market.

Imperfect Monopoly - The monopolist controls the entire market supply for its product as there is no close substitute, but there is a remote substitute for the product available in the market.

Simple Monopoly - A simple monopoly is one in which a single seller sells its product or service for a single price. There is no price discrimination in a simple monopoly.

Discriminating Monopoly - A discriminating monopoly is one where a single seller does not sell his product or service for a single price. Price discrimination is witnessed wherein prices may vary from region to region, or people coming from different economic backgrounds may be charged a different price, etc.

Legal Monopoly - A legal monopolist enjoys government approved rights like trade mark, patent, copy right, etc.

Natural Monopoly - A natural monopolist enjoys or benefits from natural factors like locational advantages, locational reputation, natural talents and skill sets of the producers, etc.

Technological Monopoly - When a firm holds a technologically superior position that other firms cannot compete with, the firm is said to be a technological monopoly.

Joint Monopoly - When two or more firms join hands in order to form a monopoly, it is referred to as a joint or a shared monopoly.

Monopoly Examples

Some examples of monopolies which have great historical significance are listed below:

Andrew Carnegie's Steel Company (now U.S. Steel): From the late 19th century to the early 20th century, Carnegie's Steel Company maintained a singular control over steel in the US market.

American Tobacco Company: Incorporated in North Carolina on 31 Jan. 1890 by James B. Duke, American Tobacco Company maintained a singular control over tobacco in America till 1906 and controlled four-fifths of the entire domestic tobacco industry other than cigars.

Barriers to Entry: How a Monopoly Maintains its Power

Several factors and strategies allow a monopoly to maintain the power that it holds in an industry. These essentially pose as barriers to entry to potential entrants. Some of these are:

Economies Of Scale

When it is said that the production of a certain commodity has become efficient, it means that the firm does not have to spend large amounts on the cost of production. After existing in the market for a considerable period of time, output can be generated at a larger scale with fewer input cost. This is known as economies of scale.

Due to this phenomenon, the output generated by a monopolist is large, with lesser input cost. In case a new firm tries to enter, the cost of production would be higher than that of the monopolist and the output generated would be lower than the monopolist. It is, hence, evident that the new entrant would be at a disadvantage in terms of production costs. Hence, the monopolist gains a cost advantage.
This inevitable disadvantage deters potential entrants and so, economies of scale poses as a barrier to entry.

Strategic Pricing

Strategic Pricing allows a monopolist to charge any price for their offerings. The price may be set to be extremely low - predatory pricing - in order to prevent any firm from entering the market. This is often done by a monopolist to demonstrate power and pressurise potential and existing rivals.

Sometimes, a monopolist often sets the price of its product or service just above the average cost of production of the product/service. This move ensures no competition. This is because if a competitor too decides to charge the same price for the commodity, the competitor will face losses as the cost of production for the monopolist is far lower than the competitor's cost of production.

Ownership Of Essential And Scarce Resources

Monopolies that first enter a market have access to resources that it may choose to keep for itself. Due to this, these scarce but essential resources are made unavailable to the potential entrants.

This is often the case with natural monopolies.

High Sunk costs

Sunk costs are those which cannot be retrieved in the case a firm shuts down. These are costs that are essential for the firm, like advertising costs, but cannot be recovered.

With the existence of a large monopoly, the risk of a potential entrant going out of businesses always looms. Hence, these potential entrants hesitate when it comes to taking a risk that could cost them too much. This consequently poses as a barrier to entry.

Monopolies maintain their power by creating contracts with suppliers and retailers.

Consumer Brand Loyalty

Consumers often develop trust and loyalty with firms that offer them quality products and services. A sense of familiarity that generates consequently deters them from going elsewhere to satisfy their demand. This does not allow other entrants a chance. Hence, they find it difficult to capture market share for the product and service that they offer.

A great example of a company using this technique to develop a monopoly is Google.

Advantages Of Monopoly

Monopolies are advantageous to economies in some ways. Some of these reasons are listed below:

No price wars - Price wars often discompose markets. In the absence of price wars, consumers enjoy a certain degree of certainty with regards to the prices they pay for a commodity. Hence, this becomes an advantage that monopolies bring to consumers in a market.

Large economies of scale - A monopoly has the power to produce large quantities of output at low input costs. Thus, they can and provide them to the masses at lower costs. But this advantage would benefit consumers only if the monopoly is ethical.

More research and development- A monopoly tends to feel confident about its market share. This encourages them to go ahead and invest more in research and development. Research and development leads to the generation of new goods and services as well as enhanced manufacturing efficiencies which eventually benefits consumers.

Disadvantages Of Monopoly

The disadvantages of a monopoly in an economy often outweigh its advantages. Below listed are the disadvantages of a monopoly:

Affects the quality of products and services offered - Due to a lack of competition, monopolists often do not realise the need to upgrade. They tend to not engage in innovating, and so, many monopolies go out of trend for the same. A good example of this could be Blackberry, a cellphone brand that captivated the global market in the early 2000s but has now been compelled to discontinue making its own smartphones in 2016. Monopolies also offer inferior products and services in an attempt to save on the cost of production. Since there are no close substitutes, consumers have no option but to buy these inferior products.

Higher prices - A monopoly is essentially a price maker. Monopolies have the power to determine the price of their commodity without having to analyse competitor prices since there are virtually o competitors. This allows them to indulge in charging excessive prices for their commodities.

Price discrimination - This selling strategy is employed by monopolies wherein they charge different prices for the same product in different markets. They charge a price based on what they think the consumer would agree to. For example, a product that is being sold at a relatively affluent area would be priced more than the same product that is being sold at a poor.

Go On, Tell Us What You Think!

Did we miss something? Come on! Tell us what you think about our article in the comments section.

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Monopoly: Definition, Types, Characteristics, & Examples | Feedough

# data[].attributes.attachment_link.description
Economies around the world witness a combination of different market structures. While there's a lot of competition in most industries, some industries witness just one seller. There exists no competition in such industries as there are virtually no other players. Such market structures are termed as monopolies.

# data[].attributes.attachment_link.readable_text
Economies around the world witness a combination of different market structures. While there's a lot of competition in most industries, some industries witness just one seller. There exists no competition in such industries as there are virtually no other players. Such market structures are termed as monopolies.

But what exactly is a monopoly and how does it work?

Let's find out.

What is a monopoly?

A monopoly is a market structure that consists of a single seller who has exclusive control over a commodity or service.

The word mono means single or one and the prefix polein finds its roots in Greek, meaning "to sell". Hence, the word monopoly literally translates to single seller.

To understand the concept better, let's break the definition into three key-phrases -

Market structure: A market structure is how a market is organised. It explains the competition in the market and how different players are connected to each other.

Single seller: A single seller is the key characteristic of a monopoly. This means that only a single seller is solely responsible for the production of output of a certain good.

Exclusive control: Exclusive control, in this context, is the power an entity has over the production and selling of the concerned offering.

Characteristics of a monopoly

A monopoly displays characteristics that are different from other market structures. These characteristics are as follows:

Single seller - A single seller has total control over the production, and selling of a specific offering. This also means that the seller has no competition and holds the entire market share of the offering that it deals in.

No close substitutes - The monopolist produces a product or service that has no similar or close substitute.

Barriers to entry - In a monopoly market structure, new firms cannot enter the industry due to barriers like government regulations, contracts, insurmountable costs of production, etc.

Price maker - A monopolist has the power to charge any price for its product of service.

Types of monopoly

There exist several different types of monopolies in an economy. These different types of monopolies are listed below:

Private Monopoly - A private monopoly is one that is owned by an individual or a group of individuals. These monopolies mainly aim for profits.

Public Monopoly - A public monopoly is one that is owned by the government. These monopolies are set up for the welfare of the masses. An example of a public monopoly would be the U. S. Postal Service.

Pure/ Absolute Monopoly - The monopolist controls the entire market supply for its product without facing any form of competition. This is possible because there is absolutely no close or remote substitute available in the market.

Imperfect Monopoly - The monopolist controls the entire market supply for its product as there is no close substitute, but there is a remote substitute for the product available in the market.

Simple Monopoly - A simple monopoly is one in which a single seller sells its product or service for a single price. There is no price discrimination in a simple monopoly.

Discriminating Monopoly - A discriminating monopoly is one where a single seller does not sell his product or service for a single price. Price discrimination is witnessed wherein prices may vary from region to region, or people coming from different economic backgrounds may be charged a different price, etc.

Legal Monopoly - A legal monopolist enjoys government approved rights like trade mark, patent, copy right, etc.

Natural Monopoly - A natural monopolist enjoys or benefits from natural factors like locational advantages, locational reputation, natural talents and skill sets of the producers, etc.

Technological Monopoly - When a firm holds a technologically superior position that other firms cannot compete with, the firm is said to be a technological monopoly.

Joint Monopoly - When two or more firms join hands in order to form a monopoly, it is referred to as a joint or a shared monopoly.

Monopoly Examples

Some examples of monopolies which have great historical significance are listed below:

Andrew Carnegie's Steel Company (now U.S. Steel): From the late 19th century to the early 20th century, Carnegie's Steel Company maintained a singular control over steel in the US market.

American Tobacco Company: Incorporated in North Carolina on 31 Jan. 1890 by James B. Duke, American Tobacco Company maintained a singular control over tobacco in America till 1906 and controlled four-fifths of the entire domestic tobacco industry other than cigars.

Barriers to Entry: How a Monopoly Maintains its Power

Several factors and strategies allow a monopoly to maintain the power that it holds in an industry. These essentially pose as barriers to entry to potential entrants. Some of these are:

Economies Of Scale

When it is said that the production of a certain commodity has become efficient, it means that the firm does not have to spend large amounts on the cost of production. After existing in the market for a considerable period of time, output can be generated at a larger scale with fewer input cost. This is known as economies of scale.

Due to this phenomenon, the output generated by a monopolist is large, with lesser input cost. In case a new firm tries to enter, the cost of production would be higher than that of the monopolist and the output generated would be lower than the monopolist. It is, hence, evident that the new entrant would be at a disadvantage in terms of production costs. Hence, the monopolist gains a cost advantage.
This inevitable disadvantage deters potential entrants and so, economies of scale poses as a barrier to entry.

Strategic Pricing

Strategic Pricing allows a monopolist to charge any price for their offerings. The price may be set to be extremely low - predatory pricing - in order to prevent any firm from entering the market. This is often done by a monopolist to demonstrate power and pressurise potential and existing rivals.

Sometimes, a monopolist often sets the price of its product or service just above the average cost of production of the product/service. This move ensures no competition. This is because if a competitor too decides to charge the same price for the commodity, the competitor will face losses as the cost of production for the monopolist is far lower than the competitor's cost of production.

Ownership Of Essential And Scarce Resources

Monopolies that first enter a market have access to resources that it may choose to keep for itself. Due to this, these scarce but essential resources are made unavailable to the potential entrants.

This is often the case with natural monopolies.

High Sunk costs

Sunk costs are those which cannot be retrieved in the case a firm shuts down. These are costs that are essential for the firm, like advertising costs, but cannot be recovered.

With the existence of a large monopoly, the risk of a potential entrant going out of businesses always looms. Hence, these potential entrants hesitate when it comes to taking a risk that could cost them too much. This consequently poses as a barrier to entry.

Monopolies maintain their power by creating contracts with suppliers and retailers.

Consumer Brand Loyalty

Consumers often develop trust and loyalty with firms that offer them quality products and services. A sense of familiarity that generates consequently deters them from going elsewhere to satisfy their demand. This does not allow other entrants a chance. Hence, they find it difficult to capture market share for the product and service that they offer.

A great example of a company using this technique to develop a monopoly is Google.

Advantages Of Monopoly

Monopolies are advantageous to economies in some ways. Some of these reasons are listed below:

No price wars - Price wars often discompose markets. In the absence of price wars, consumers enjoy a certain degree of certainty with regards to the prices they pay for a commodity. Hence, this becomes an advantage that monopolies bring to consumers in a market.

Large economies of scale - A monopoly has the power to produce large quantities of output at low input costs. Thus, they can and provide them to the masses at lower costs. But this advantage would benefit consumers only if the monopoly is ethical.

More research and development- A monopoly tends to feel confident about its market share. This encourages them to go ahead and invest more in research and development. Research and development leads to the generation of new goods and services as well as enhanced manufacturing efficiencies which eventually benefits consumers.

Disadvantages Of Monopoly

The disadvantages of a monopoly in an economy often outweigh its advantages. Below listed are the disadvantages of a monopoly:

Affects the quality of products and services offered - Due to a lack of competition, monopolists often do not realise the need to upgrade. They tend to not engage in innovating, and so, many monopolies go out of trend for the same. A good example of this could be Blackberry, a cellphone brand that captivated the global market in the early 2000s but has now been compelled to discontinue making its own smartphones in 2016. Monopolies also offer inferior products and services in an attempt to save on the cost of production. Since there are no close substitutes, consumers have no option but to buy these inferior products.

Higher prices - A monopoly is essentially a price maker. Monopolies have the power to determine the price of their commodity without having to analyse competitor prices since there are virtually o competitors. This allows them to indulge in charging excessive prices for their commodities.

Price discrimination - This selling strategy is employed by monopolies wherein they charge different prices for the same product in different markets. They charge a price based on what they think the consumer would agree to. For example, a product that is being sold at a relatively affluent area would be priced more than the same product that is being sold at a poor.

Go On, Tell Us What You Think!

Did we miss something? Come on! Tell us what you think about our article in the comments section.

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Monopoly: Definition, Types, Characteristics, & Examples | Feedough

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Economies around the world witness a combination of different market structures. While there's a lot of competition in most industries, some industries witness just one seller. There exists no competition in such industries as there are virtually no other players. Such market structures are termed as monopolies.

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The final production inventory.

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We have to reduce the cost of production by thinking for new opportunities

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Bharat steel Ltd.

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Not supply row material

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Serious about company profit.

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Profit gain

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Marginal gains and increase sales of company

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Purchase the companies shares

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Case of manufacturing monopoly.

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Competatior to bharat steel limited.

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Made for Play: Board Games & Modern Industry

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Managing Director

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Managing Director Photos and Premium High Res Pictures - Getty Images

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Find the perfect Managing Director stock photos and editorial news pictures from Getty Images. Select from premium Managing Director of the highest quality.

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Staff of a company . CodyCross is an addictive game developed by Fanatee. Are you looking for never-ending fun in this exciting logic-brain app? Each world has more than 20 groups with 5 puzzles each. Some of the worlds are: Planet Earth, Under The Sea, Inventions, Seasons, Circus, Transports and Culinary Arts. We are sharing all the answers for this game below. The newest feature from Codycross is that you can actually synchronize your gameplay and play it from another device. Simply login with Facebook and follow th instructions given to you by the developers.

ANSWER: WORKFORCE

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Staff of a company - CodyCross Answers All Levels

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Staff of a company . CodyCross is an addictive game developed by Fanatee. Are you looking for never-ending fun in this exciting logic-brain app? Each world has more than 20 groups with 5 puzzles each. Some of the worlds are: Planet Earth, Under The Sea, Inventions, Seasons, Circus, Transports and Culinary Arts.

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Might visibility be the new mentoring? Developing talent is crucial, yet today's leaders find themselves with more responsibility than ever. Leveraging employee visibility as mentorship is a strategy that can help managers to meaningfully support their employees.
Read More

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Working across departments: why it's important

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Might visibility be the new mentoring? Developing talent is crucial, yet today's leaders find themselves with more responsibility than ever. Leveraging employee visibility as mentorship is a strategy that can help managers to meaningfully support their employees. Read More

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What Is Financial Analysis?

To understand and value a company, investors examine its financial position by studying its financial statements and calculating certain ratios. Fortunately, it is not as difficult as it sounds to perform a financial analysis of a company. The process is often a part of any program evaluation review technique (PERT), a project management tool that provides a graphical representation of a project's timeline.

Understanding an Analysis of a Company's Financial Position

If you borrow money from a bank, you have to list the value of all of your significant assets, as well as all of your significant liabilities. Your bank uses this information to assess the strength of your financial position; it looks at the quality of the assets, such as your car and your house, and places a conservative valuation upon them. The bank also ensures that all liabilities, such as mortgage and credit card debt, are appropriately disclosed and fully valued. The total value of all assets less the total value of all liabilities gives your net worth or equity.

Evaluating the financial position of a listed company is similar, except investors need to take another step and consider that financial position in relation to market value. Let's take a look.

The Balance Sheet

Like your financial position, a company's financial situation is defined by its assets and liabilities. A company's financial position also includes shareholder equity. All of this information is presented to shareholders in the balance sheet.﻿﻿

Suppose that we are examining the financial statements of the fictitious publicly listed retailer The Outlet to evaluate its financial position. To do this, we review the company's annual report, which can often be downloaded from a company's website. The standard format for the balance sheet is assets, followed by liabilities, then shareholder equity.

Current Assets and Liabilities

On the balance sheet, assets and liabilities are broken into current and non-current items. Current assets or current liabilities are those with an expected life of fewer than 12 months. For example, suppose that the inventories that The Outlet reported as of Dec. 31, 2018, are expected to be sold within the following year, at which point the level of inventory will fall, and the amount of cash will rise.

Like most other retailers, The Outlet's inventory represents a significant proportion of its current assets, and so should be carefully examined. Since inventory requires a real investment of precious capital, companies will try to minimize the value of a stock for a given level of sales, or maximize the level of sales for a given level of inventory. So, if The Outlet sees a 20% fall in inventory value together with a 23% jump in sales over the prior year, this is a sign they are managing their inventory relatively well. This reduction makes a positive contribution to the company's operating cash flows.

Current liabilities are the obligations the company has to pay within the coming year and include existing (or accrued) obligations to suppliers, employees, the tax office, and providers of short-term finance. Companies try to manage cash flow to ensure that funds are available to meet these short-term liabilities as they come due.﻿﻿

The Current Ratio

The current ratio-which is total current assets divided by total current liabilities-is commonly used by analysts to assess the ability of a company to meet its short-term obligations. An acceptable current ratio varies across industries, but should not be so low that it suggests impending insolvency, or so high that it indicates an unnecessary build-up in cash, receivables, or inventory. Like any form of ratio analysis, the evaluation of a company's current ratio should take place in relation to the past.

Non-Current Assets and Liabilities

Non-current assets or liabilities are those with lives expected to extend beyond the next year. For a company like The Outlet, its biggest non-current asset is likely to be the property, plant, and equipment the company needs to run its business.

Long-term liabilities might be related to obligations under property, plant, and equipment leasing contracts, along with other borrowings.

Financial Position: Book Value

If we subtract total liabilities from assets, we are left with shareholder equity. Essentially, this is the book value, or accounting value, of the shareholders' stake in the company. It is principally made up of the capital contributed by shareholders over time and profits earned and retained by the company, including that portion of any profit not paid to shareholders as a dividend.

Market-to-Book Multiple

By comparing the company's market value to its book value, investors can, in part, determine whether a stock is under- or over-priced. The market-to-book multiple, while it does have shortcomings, remains a crucial tool for value investors. Extensive academic evidence shows that companies with low market-to-book stocks perform better than those with high multiples. This makes sense since a low market-to-book multiple shows that the company has a strong financial position in relation to its price tag.﻿﻿

Determining what can be defined as a high or low market-to-book ratio also depends on comparisons. To get a sense of whether The Outlet's book-to-market multiple is high or low, it should be compared to the multiples of other publicly listed retailers.

In summary, a company's financial position tells investors about its general well-being. A financial analysis of a company's financial statements-along with the footnotes in the annual report-is essential for any serious investor seeking to understand and value a company properly.

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How to Analyze a Company's Financial Position

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To understand and value a company, investors examine its financial position by studying its financial statements and calculating certain ratios. Fortunately, it is not as difficult as it sounds to perform a financial analysis of a company. The process is often a part of any program evaluation review technique (PERT), a project management tool that provides a graphical representation of a project's timeline.

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How do you measure your business's success?

Is it by customer satisfaction? Employee happiness? The number of days since the last incident, à la Monsters Inc.?

All of those are important factors, but the most important is your company's profit and loss. After all, if profits from the goods or services you sell don't outweigh expenses, your business won't be around to keep customers or employees happy for much longer.

So how do you find places to cut costs and improve your profit margin? Through a handy little sheet called a profit and loss (P&L) statement, otherwise known as an income statement. It's one of the most commonly used documents in the business world, and for good reason: it breaks down your business's costs and gains so you can pinpoint ways to grow your company's revenue.

If you just want to write a P&L statement, check out our article on how to prepare a profit and loss statement by hand. But if you want to know more about how an income statement can help you manage profit and loss, keep reading-we talk about what profit and loss means, what a P&L report includes, and how accounting software can help you chart your progress.

What is profit and loss, and why do you need to manage it?

When you want to know how your business is doing, it's tempting to look at only your gross revenue, which is the total amount you make from the sales of goods or services. But charting profit and loss is a much clearer, better way to see how your business is really doing beyond just the baseline of sales.

Why? Because your profit and loss doesn't only measure how much you make but how much you lose to expenses. When you chart your profit and loss, you can identify gaps in your savings and expenses, defusing fiscal problems-like spending more than your income allows on a business internet and phone plan-before they explode into major losses.

What is a profit and loss statement?

Now you know why you should chart profit and loss. The next step is learning how to chart profit and loss by creating an (aptly named) profit and loss statement-a.k.a. an income statement or P&L statement.

A profit and loss statement is a common financial document that shows your income in a given time frame-usually, that's monthly, quarterly, or yearly. More importantly, though, a P&L statement details the direct costs of creating goods and the indirect costs of operating a business.

Not quite sure what those terms mean in the real world? If you operate a hair salon, each hair cut, dye job, or wedding-day hair styling adds to your income. Meanwhile, each pair of scissors you buy or bottle of dye you reorder adds to your direct costs. And things like your monthly electric bill add to your indirect costs, since bills like these are crucial to daily operations but aren't directly tied to creating your product.

Who uses profit and loss statements?

Profit and loss statements are invaluable to those who manage the company's profit and loss. That person could be the CFO, the accountant, or the small-business owner themselves. However, other groups also look at income statements. Large public companies are required to release them, and banks and other financial institutions often require them before signing off on a loan.

What if you want to understand your profit and loss but your business is new enough that you don't have much data? You can still estimate your profit and loss and budget accordingly with a pro forma profit and loss statement. Since this initial P&L statement requires a lot of guesswork, be as generous with your costs as you are cautious with your profits.

How to read a profit and loss statement

A simple profit and loss statement is fairly easy to read. Here's a rundown of what each section means.

Revenue
Revenue is the money you're bringing in from sales of services or goods. Your total revenue is also your break-even point; if you spend exactly as much as you earn, you'll break even, but your business won't be profitable. If you want your business to be profitable, your revenue needs to exceed your costs.

Direct costs
Direct costs refer to expenses you incur when making your product or delivering your services. In other words, any expense connected to the company's products or services is a direct cost. Direct costs are sometimes called cost of goods sold, or COGS, but only if you sell a physical product, like baked goods, and not a service like an eye exam.

Gross margin
Gross margin is calculated by subtracting direct costs from revenue. Having a high gross margin is one of the best indicators of strong financial health.

Operating expenses
Operating expenses are any costs you incur to keep your business up and running. These expenses typically include rent, administrative expenses, marketing, salaries, utilities, and so on.

Operating income
Operating income refers to earnings before interest, taxes, depreciation, and authorization. You can calculate operating income by deducting operating expenses from your gross margin.

Net profit
Net profit, otherwise known as "the bottom line," is the profit after expenses have been deducted from the total revenue.

How to make a profit and loss statement

Several financial tools and profit and loss templates can help small-business owners prepare an income statement. A profit and loss report should be included in the basic package of most online accounting software.

If you aren't quite ready to commit to accounting software, you can prepare a simple profit and loss statement by creating a table on Microsoft Excel. Still, while it's possible to make a profit and loss statement on your own, it's a good idea to have a CPA look over your by-hand statements to verify that you calculated everything correctly.

Next steps for managing profit and loss

Creating an income statement is the crucial first step for managing profit and loss. Doing so lays out your gains and losses clearly and should give you some clear starting points for where to trim costs.

But creating a good P&L statement is just one part of managing your company's profit and loss. Once you've built your detailed income statement, take these steps to sort out how profitable your company is versus how profitable it could be:

1. Compare your current P&L statement with past statements. Has anything changed drastically? If so, can you identify how or why?

2. Meet with a CPA, accountant, or financial analyst to get help identifying areas of improvement.

3. Continue to keep detailed records of your company's profits and losses so you can create new, accurate P&L statements every month or quarter.

The best financial statement tools

Choosing the right financial software can streamline the P&L management process. But with so many P&L reporting tools out there, which should you choose? Here's a roundup of our favorite accounting tools that also offer profit and loss statements for small businesses.

QuickBooks helps business owners make an accurate and professional profit and loss statement. Its P&L reports show total income, subtotals for income or expense accounts, profit margins, categorization of expenses and losses, detailed transaction lists for any entry, customized percentages, and alerts to over- or underspending. Plus, QuickBooks offers easy integrations and affordable monthly fees.

Xero: Best customer service

Xero's solid accounting software comes with easy-to-use financial reporting tools that allow business owners to understand their real-time cash flow. Each package covers the basics, including financial performance reporting-meaning you won't have to worry about paying more for the reports you need. And if you run into a problem, Xero provides customer support and has an abundance of how-to articles and tutorials.

Freshbooks: Most user-friendly

FreshBooks gives business owners a detailed breakdown of profit and loss, so you'll know exactly how profitable you are. Each package offers financial performance reports, and to better serve its customers, FreshBooks offers complete mobile access for iPad, iPhone, Android devices, and other gadgets.

Wave: Most affordable alternative

Wave has recently integrated P&L statements, balance sheets, and cash flow statements. Its financial reporting gives you the full picture when it comes to the health of your business. However, Wave's number one selling feature is you have to pay for extra services only when you need them, which means the essential system is free with no strings attached.

GoDaddy Bookkeeping: Most convenient

GoDaddy Bookkeeping delivers real-time reports on profit and loss, total expenses, and more. The platform is convenient even for business owners who don't have accounting experience. Plus, they offer three affordable packages, ranging from $3.99 per month to $11.99 per month.

Frequently asked questions

What is a profit and loss account?

A profit and loss account keeps track of a business's annual net worth, which you can calculate by subtracting your liabilities (or money and assets owed) from your net profit. The term "net worth" is often used interchangeably with the term "shareholders' equity."

What is a trading profit and loss account?

A trading profit and loss account is actually a combination of two accounts in your general ledger, and we're betting you can guess which two . . . That's right, the trading account and the profit and loss account.

While a profit and loss account tracks net worth or shareholder equity, a trading account tracks your gross profit-an amount that only relates to sales and purchases of goods or services (that would be the "trading" part of the trading account). To get your gross profit, subtract direct costs from direct revenue.

Combine the two accounts and you get a trading profit and loss account, which shows the outcome of trading activities. The combined account should tell you the profit earned or loss suffered on the purchase and sale of goods.

What is the difference between a P&L statement and a balance sheet?

P&L statements and balance sheets are two of the most important financial statements for a business. A P&L statement overviews how a business is performing by showing revenue, direct costs, and business expenses. In contrast, a balance sheet summarizes all of a business's long-term assets, liabilities, and shareholders' equity.

What is the difference between a P&L statement and a cash flow statement?

A cash flow statement shows where your cash is coming from and where it's going. Along with showing money earned from sales, it should show the money you earn from investing and trade opportunities plus cash from bank loans or other financing options. And of course, it details the outflow of cash; like a profit and loss statement, it can tell you if you're spending more than you're earning.

Wait, if both statements show your profits and losses, is there really a difference between the two sheets? Yes! A few things set the two apart, but the main one is that an income statement can show non-cash assets and liabilities, not just cash-based ones.

What counts as a non-cash asset and liability? Two of the most common (unfortunately, both liabilities) are depreciation and amortization.

Depreciation refers to an asset losing value over time, like, say, a brand-new commercial washing machine for your laundromat. Before you used it, the machine was worth what you paid for it. But once you run your first load of laundry, the machine experiences normal wear and tear, which lowers its value.

Amortization basically means the same thing as depreciation, but it applies only to intangible assets instead of physical things like washing machines. Those assets could be copyrights for new products or trademarks for new designs, two things companies spend big money on but that start to lose value as soon as they're purchased.

As you can tell, income statements, balance sheets, and cash flow statements are closely related. Honestly, if you want to see how your business is doing overall, it's a good idea to work with all three.

If you're tired of not knowing where your business stands financially, a simple profit and loss statement will lay out the hard data (and maybe a few hard truths) so you know where to improve. So whether you run a pet store, homemade-donut shop, or fledgling law firm, remember: strategic P&L management guided by a detailed income statement will help you keep earnings positive and minimize expenses.
Want help from a qualified bookkeeper who can take tasks like preparing profit and loss statements off your plate? See our piece on bookkeeping software to see if one of our recommendations meets your needs.

Disclaimer At Business.org, our research is meant to offer general product and service recommendations. We don't guarantee that our suggestions will work best for each individual or business, so consider your unique needs when choosing products and services.

Business.org Staff Writer

Business.org is committed to providing up-to-date, valuable information to help our users make easy and successful decisions. Our team works collaboratively behind the scenes to ensure our pieces meet high standards for the best possible content.

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How to Best Manage Your Company's Profit and Loss | Business.org

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How do you measure your business's success? Is it by customer satisfaction? Employee happiness? The number of days since the last incident, à la Monsters Inc.? All of those are important factors, but the most important is your company's profit and loss.

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To see how significant currency risk can be, consider how some U.K. companies have been impacted by the deteriorating value of the pound sterling (GBP) they use to make key purchases. For example, the airline EasyJet reported before-tax earnings of £495 million in 2016, a decrease of £191 million from 2015 - but that figure reflected £88 million in "unfavourable movement from foreign exchange." ¹

Negative Currency Risk Impact: Widespread and Significant

While currency risk impacts aren't always this large, they are often significant. According to currency risk analytics software provider FiREapps, in the fourth quarter of 2016 245 out of 850 U.S.-based companies surveyed reported negative currency impacts, averaging $0.04 per share. FiREapps notes that many enterprises have set a "best-practice" goal of limiting currency risk impact to just $0.01 per share, so four cents is quite meaningful. It can make the difference between meeting or missing analysts' targets.

According to Seeking Alpha's analyst earnings call transcripts, companies reporting currency risk headwinds during the first half of 2017 include:

Alphabet (Google's parent company), which reported "a negative currency impact on our revenues year over year of $304 million" but said its currency risk hedging program had cut those losses to $87 million;³

Beauty product manufacturer Estee Lauder, which projects that currency translation will "depress reported sales for the full fiscal year by nearly 2 percentage points";⁴

Technology company Hewlett Packard Enterprise, which recently reported that "currency remained unfavorable and was an 80-basis point year-over-year headwind to revenue."⁵ (A basis point is 1/100th of a percentage point, or 0.01 percent. Hence, an 80 basis point headwind means that the company's profit margin was 0.8 percent lower due to currency shifts.)

Apparel manufacturer VF Corporation, which reported that its first quarter results were down 50 basis points instead of 10 "primarily as a result of the negative impact of changes in foreign currency."⁶ In other words, these factors reduced profit margins by 0.4 percent.

Currency Cycles: Getting Shorter

For enterprise finance teams, managing currency risk is made more difficult by the increasing speed of exchange rate shifts. Currencies are more likely to reverse direction faster, demanding greater agility from managers who must quickly move from planning for rising to falling currency values (or vice versa). As FiREapps puts it, "currency cycles are now measured in quarters, not years." ⁷

The most volatile currencies can also change rapidly. In 4Q16, the most volatile G20 currencies were the South Korean won, the euro, the Turkish lira, the Indonesian rupiah, and the Australian dollar; in 3Q16 they were sterling, the Russian ruble, Argentine peso, Brazilian real, and Indonesian rupiah. Only Indonesia's currency appeared on both lists.

Sometimes, the shifts happen even faster. As Global Finance Magazine notes, volatility in global currency markets was actually "at unusually low levels" during the second quarter of 2016, until the markets were surprised by the U.K. vote to leave the EU. The pound's value dropped precipitously less than a week before the quarter ended - "catching many multinationals off guard." ⁸

Visibility: Sometimes Inadequate

Small and medium enterprises (SMEs) finding it challenging to understand the impact of currency risk on their businesses may take comfort in knowing they are not alone. FiREapps believes even more large companies are struggling with currency shifts than report the problem publicly. Those "that did not disclose headwinds in Q4 2016 most likely did not report because they are not confident in their data... when faced with the risk of reporting materially incorrect numbers they chose not to report at all... [since reporting] requirements are lax in this area." ⁹

Other recent executive surveys may lend support to this hypothesis. For example, a 2016 Deloitte survey found that "lack of visibility into FX exposures... is a challenge for nearly 60 percent of [executive] respondents. This challenge is pervasive... Without accurate measurement... value erosion from negative currency rate movements cannot be minimized." ¹⁰ A 2017 Treasury Strategies survey found that FX and financial risk management issues trailed only cash management amongst corporate treasurers' top priorities and benchmarking concerns. ¹¹

There is Positive Currency Risk Impact, Too

It's also the case that some companies benefit from currency "tailwinds" that increase their profits. In late 2016 and early 2017, companies reporting this pleasant event include:

German automaker Daimler, which recently projected currency tailwinds significantly above 500 million euros for the current year;¹²

British American Tobacco, which recently said "First half EPS is expected to benefit from a significant currency translation tailwind of around 14 percent";¹³

GlaxoSmithKline, which said the pound's devaluation against the dollar would give it a 9 percent forex tailwind, given that it books one-third of its sales in the U.S.;¹⁴

The British-based global advertising firm WPP - which also serves many U.S. clients - said its billings soared by 16 percent in 2016 - and fully 2/3 of that growth reflected currency shifts.¹⁵

Currency Risk Winds Can Also Mix

Small, medium, or large enterprises that do business globally can experience mixtures of currency tailwinds and headwinds. For example, News Corporation - the global media firm with roots in Australia and the U.K. that owns Dow Jones & Company - says risk from shifting currency reduced its revenues by $21 million in the most recent quarter, "with modest year-over-year improvement in the Australian dollar" more than canceled out by the pound's weakness. Despite its overall currency losses, NewsCorp actually earned $6M from favorable foreign currency fluctuations associated with its Australian real estate advertising business, and similar shifts boosted its cable network programming business. ¹⁶

So, too, a company's exposure to currency risk may change dramatically in the wake of major events such as acquisitions or divestments. For example, Treasury & Risk reports that when eBay spun off PayPal in 2015, it lost many natural hedges that existed when these very different businesses were unified. Mitigating euro-dollar exposures now requires a "highly complex" corporate finance project encompassing a wide array of business functions and stakeholders. ¹⁷

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The Effects of Exchange Rate Fluctuations | Amex US

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To see how significant currency risk can be, consider how some U.K. companies have been impacted by the deteriorating value of the pound sterling (GBP) they use to make key purchases. For example, the airline EasyJet reported before-tax earnings of £495 million in 2016, a decrease of £191 million from 2015 - but that figure reflected £88 million in "unfavourable movement from foreign exchange."

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The list of the world's most profitable companies offers a glimpse of which countries wield the most economic power and the sectors with the most economic influence. The world's largest two economies by far, the U.S. and China, are headquarters for every one of the 10 most profitable companies: half are U.S. and half are Chinese. Equally important, half of the corporations on the list are technology companies and the other half are financial companies.

Only companies listed on U.S. or Canadian exchanges, either directly or through ADRs, are included in this list. Saudi Aramco, Saudi Arabia's state oil company, for example, went public on the Saudi Stock Exchange in December 2019. It would have been among the world's 10 most profitable companies, and would have even topped the list in previous years.

Notably, four of the five tech firms on the list are U.S. and two of them hold the top two slots. The technology sector is comprised of companies that manufacture computers and electronics, develop software, and provide services relating to information technology, such as cloud computing and e-commerce.

Four out of the five financial companies on the list are based in China, most of them receiving major financial support from China's central government. The financial sector is comprised of banks, investment companies, insurance companies, and real estate firms. These companies offer a range of financial services, including deposits, loans, investment and wealth management, insurance, and brokerage services.

These are the 10 most profitable companies by 12-month trailing (TTM) net income. Some companies outside the U.S. report profits semi-annually instead of quarterly, so the 12-month trailing data may be older than it is for companies that report quarterly. Data is courtesy of YCharts.com. All figures are as of September 8.

Net Income (TTM): $58.4 billion

Revenue (TTM): $273.9 billion

Market Cap: $2.1 trillion

1-Year Trailing Total Return: 133.6%

Exchange: NASDAQ

Apple designs and manufactures mobile communication and media devices, personal computers, and portable digital music players. The company also sells a range of related software, services, accessories, networking solutions, music and video streaming, as well as third-party digital content and applications. Apple is best known for its series of iPhones, iPads, and Mac personal computers.

Microsoft develops, licenses, and supports a range of software products, services, and devices. The company's products include operating systems, server applications, business applications, software development tools, video games, and more. The company also manufactures personal computers, tablets, gaming and entertainment consoles, phones, other intelligent devices, and related accessories. Microsoft also offers cloud-based solutions, its fastest-growing business, through its Azure cloud-computing platform.

Industrial and Commercial Bank of China provides commercial banking and financial services. Those services include corporate and personal loans, trade financing, deposit-taking, corporate and personal wealth management, and custodial services. The company also engages in investment activities for its own account or on behalf of customers, including money market transactions, investment securities, foreign exchange transactions, and the holding of derivative positions.

China Construction Bank provides a wide range of financial services to corporate and individual customers, including corporate and personal loans, deposit-taking, wealth management, trade financing, financial consulting and advisory services, and remittance services. The bank also engages in investment activities such as inter-bank money market transactions, investments in debt securities, equities, as well as trading of derivatives and foreign currency.

Alphabet is a holding company and the parent of Google Inc., its primary business. Google offers a range of Internet products, including Search, Ads, Commerce, Maps, YouTube, Google Cloud, Android, Chrome, and Google Play. It engages in advertising, sale of digital content, applications, cloud computing services, and sale of hardware products. Alphabet also offers smart-home products through Nest, online video gaming through Stadia, and is developing autonomous-driving technology through its Waymo project.

Agricultural Bank of China provides provides international commercial banking and financial services. It offers financial products and services to individuals, corporations, government agencies, and financial institutions. The bank also engages in money market or repurchases transactions, debt instrument investments, and holding of derivative positions.

JPMorgan is a global financial holding company that provides banking and financial services. The bank is involved in a broad range of businesses such as corporate lending, investment banking, market-making, prime brokerage, and treasury and securities products and services to corporations, investors, financial institutions, and government and municipal entities. It also offers consumer banking and asset management services.

Alibaba is a holding company founded in China and whose global headquarters is on the mainland even though it is legally domiciled in the Cayman Islands. It conducts various types of e-commerce businesses through its Chinese subsidiaries and variable interest entities ( VIEs). Its primary source of revenue is from its giant digital marketplace connecting consumers and merchants, which allows them to buy and sell from each other. Its businesses consist of core commerce, cloud computing, mobile media and entertainment, and other innovation initiatives.

Bank of China provides a broad range of banking and financial services to individuals, corporations, government authorities, and financial institutions. Its services include savings, deposits, lending, mortgages, credit and debit cards, trade-related products, and credit facilities. The bank also offers insurance, underwriting, stock brokerage, investment research, and asset management services.

Intel designs and manufactures computer components and related products. Its main products include microprocessors, chipsets, embedded processors, flash memory, graphic, network and communication, systems management software, digital imaging products, and more. The company's clients include original equipment manufacturers, original design manufacturers, cloud and communications service providers, as well as industrial, communications, and automotive equipment manufacturers.

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10 Most Profitable Companies in the World

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The list of the world's most profitable companies offers a glimpse of which countries wield the most economic power and the sectors with the most economic influence. The world's largest two economies by far, the U.S. and China, are headquarters for every one of the 10 most profitable companies: half are U.S.

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Manufacturing Monopoly

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1. Bharat steel limited was enjoying monopoly

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Faced problem

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Profit margin higher