What is the independent profit?
Independent profit is the profit associated with the operation of a single segment or division within a company. This is in contrast to consolidated profit, which measures the profit of a company as a whole. Measuring the independent profit of each segment or division of a company and then adding them all together is one possible way to measure the overall profit of the entire company.
When measuring stand-alone profit, values are only included if they are generated directly from the activities of the company’s segment or division.
- Independent profit measures the profitability of a particular business unit within a single company.
- By measuring independent profits, a company or analyst can see which business segments are generating the most profit for a company and which are not.
- The total profits of a company will essentially add up all the independent profits of each unit.
Understanding the independent benefit
A business segment is a component of a company that generates its own revenue and creates its own products, product lines, or service offerings. Segments typically have discrete associated costs and operations.
Independent benefits offer a method of valuing the components or segments of a company. It may be good to measure the independent earnings of each business segment to get an idea of which business segments are profitable. Independent utility analyzes the autonomous earning power of an entity by incorporating income and costs directly associated with the unit. This method determines the profit of a company as if it were composed of a series of completely independent operations.
Independent earnings analysis is important because it helps management, as well as investors and analysts, understand which divisions or product lines of the business are performing well and which are not. By understanding the different margins of the segments, management can allocate resources appropriately and, if necessary, eliminate unprofitable product lines.
Therefore, the standalone benefits can be applied to:
- Business’ s units
- Sales territories
- Geographic regions
- Specific store locations
- Divisions or departments
The sum of all the independent profits generated by each business segment allows to calculate the total profit of the entire company. Business segments and divisions can also generate separate financial statements, showing the balance sheet, income statement, and cash flow statement only for a particular area of the business. This differs from the consolidated financial statements of the company, which look at the company as a whole.
For example, a sports shoe company might report its profits for the company as a whole. To provide more detail, you could also report separate earnings (the net income for different components of the business) such as women’s shoes, men’s shoes, children’s shoes, and sportswear and accessories. If the business has multiple locations, it could also report segment earnings (geographic) for its Northwest, Midwest, and Northeast stores.