Financial reports help businesses see how they're doing and make better decisions. In this series, each article will explain a specific report, covering what it is, why a CPA needs it, how the numbers are calculated, and a simple example to show how it works. Whether it's about tracking income, managing costs, or checking how well your team is working, these articles will give you the basics to make sense of these important reports.

Profitability Report (Billing)

Quick Notes: If you think the amounts on the report are not accurate, verify whether or not you attached time entries to ALL of your invoices.

What’s in this Report?

Does include:

Archived and inactive clients
Archived Invoices

Does not include:

Deleted Invoices
Deleted clients
Archived and deleted Time Entries
Archived and deleted Expenses

Report type	Column description	Permissions requirements
Profitability: shows the total profit for each task in Canopy using Time, Labor Cost, and Amount Billed	Group: by Client or Service Item Time Tracked By: the team member who tracked hours for the client Total Hours: total hours tracked Billed Hours: hours that have been added to an invoice Billable Amount: calculated by multiplying the rate by the duration of the time entries Adjusted Amount: calculated by taking the billed amount less the billable amount Billed Amount: the amount that has been billed to the customer (For the most accurate reporting, ensure that time entries are linked to invoices.) Labor Cost: team member's hourly rate multiplied by the hours tracked Balance: amount owed by a customer	Billing Reports, Access To All Clients, Team Member Salary

📊 What is a Profitability Report (Billing)?

A Profitability Report (Billing) is a financial document that analyzes the profitability of a business by comparing its revenues (from billing) against its costs. It shows how much profit or loss the business is making, usually broken down by different categories such as customers, projects, departments, or products. The report helps the business understand which areas are most profitable and which might be costing more than they bring in.

👨🏻‍💼 Why Would a CPA Need It?

A CPA would need this report for several key reasons:

Performance Evaluation: The report helps the CPA assess the financial performance of different segments of the business. It shows which areas are generating profits and which ones might need improvement.
Cost Control: By identifying areas with low profitability or losses, the CPA can advise on cost-cutting measures or pricing adjustments to improve overall profitability.
Strategic Planning: This report provides insights for making informed business decisions, such as expanding profitable segments or discontinuing unprofitable ones.
Budgeting: It helps in creating more accurate budgets and forecasts by providing a clear picture of where the business is earning and spending money.
Stakeholder Reporting: For businesses that need to report to investors, management, or other stakeholders, this report provides a clear picture of profitability, which is crucial for decision-making.

🔢 How is the Math Calculated for This Report?

The math behind a Profitability Report (Billing) involves several steps:

Revenue Calculation:
- Total Revenue: This is the total amount of money earned from billing customers. It includes all sales, services, or other billable activities.
- For example, if a company bills $50,000 to Customer A and $30,000 to Customer B, the total revenue is $80,000.
Cost Calculation:
- Direct Costs: These are costs directly associated with providing goods or services, such as materials, labor, and other expenses that can be directly tied to billing.
- Indirect Costs: These are overhead costs that are not directly tied to a specific product or service but are necessary for operations, such as rent, utilities, and administrative expenses.
- For example, if the direct costs for Customer A are $20,000 and indirect costs are $10,000, the total costs for Customer A would be $30,000.
Profit Calculation:
- Gross Profit: This is calculated by subtracting direct costs from total revenue.
- Net Profit: This is calculated by subtracting both direct and indirect costs from total revenue.
- Using the example above, if Customer A brings in $50,000 in revenue with $20,000 in direct costs, the gross profit would be $30,000. If we subtract an additional $10,000 in indirect costs, the net profit would be $20,000.
Profitability Margin:
- Gross Profit Margin: This is calculated by dividing the gross profit by the total revenue and multiplying by 100 to get a percentage.
- Net Profit Margin: This is calculated by dividing the net profit by the total revenue and multiplying by 100 to get a percentage.
- For example, if the gross profit for Customer A is $30,000 and the revenue is $50,000, the gross profit margin would be 60%. If the net profit is $20,000, the net profit margin would be 40%.

✏️ Example Calculation:

Let’s assume a company has the following data:

Customer A:
- Revenue: $50,000
- Direct Costs: $20,000
- Indirect Costs: $10,000
Customer B:
- Revenue: $30,000
- Direct Costs: $15,000
- Indirect Costs: $5,000

Calculations:

Customer A:
- Gross Profit = $50,000 - $20,000 = $30,000
- Net Profit = $50,000 - ($20,000 + $10,000) = $20,000
- Gross Profit Margin = ($30,000 / $50,000) * 100 = 60%
- Net Profit Margin = ($20,000 / $50,000) * 100 = 40%
Customer B:
- Gross Profit = $30,000 - $15,000 = $15,000
- Net Profit = $30,000 - ($15,000 + $5,000) = $10,000
- Gross Profit Margin = ($15,000 / $30,000) * 100 = 50%
- Net Profit Margin = ($10,000 / $30,000) * 100 = 33.3%

The report would show these figures, helping the CPA understand which customers or projects are most profitable and where improvements can be made.