Earnings

Financial Dictionary -> Investing -> Earnings

Earnings is one of those words possessing a double meaning when examined closely but only a single meaning when its alter-ego is used in conversation. Income is the alter-ego. Income is analogous to both people and companies. It is calculated differently but it is needed by both entities to survive and prosper. Income to people is most often their paycheck. It is figured a bit differently from a company's earnings but the bottom line is the same. For example, with a paycheck the gross amount is computed by multiplying the hours worked by the hourly wage.

While that is the most common means, some people work on commission or a base pay plus commission or a flat salary. Regardless after all deductions for taxes, insurance, loans, etc, the bottom line is the take home pay. Companies on the other hand compute income by taking their revenues and subtracting cost of sales, operating expenses and taxes over a given period of time. A company's earnings usually refers to after-tax net income.

Notice the similarity between a person's income and a company's income. Both are after tax numbers. This number is the actual earnings because all of the mandatory deductions have been accounted for. Notice also the computation method does not indicate how a person or company will spend their earnings. Nor, does it intimate that these earnings will be spent wisely or foolishly.

One can easily surmise that if a person spends their earnings foolishly or haphazardly their personal life style will suffer. Almost the same thing can be said for a company because, generally, a business's earnings are the main determinant of its share price. If a company is not publicly traded and does not maintain a reserve set aside out of earnings, it probably won't maintain profitability. Its remaining economic life could be shortened considerably without attention to and maintenance of earnings.

Regardless of which category one is looking at when it comes to earnings, it is clear successful longevity can only be insured by the constant evaluation of income/earnings. Not minding the store (to use an old saying), almost always leads to earnings dwindling and longevity evaporating.