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What is a DRE and how can it help your business?

O que é um DRE e qual a importância dele para o seu negócio? Bluke

What is a DRE and how can it help your business?

What is a DRE and how can it help your business? 2000 1096 Pedro Henrique

Whenever we talk about accounting reports, the DRE (Income Statement of the Year) deserves prominence as one of the most important reports issued by accountants. It is a primary material for companies, small, medium or large, to visualize the health of your business.

Through this relay, managers can identify operational gaps that lack development and improvement, evaluating the company’s ability to generate profit so that, if necessary, they make decisions that change the organization’s operational model. 

The DRE definition

DRE, or Income Statement for the Year, is an accounting document that details the formation of a company’s net income in the year. This synthesis offers a complete economic report of the operational or non-operational activities of a company. But mainly, it demonstrates whether there is profit or loss in the period.

By law (No. 6,404, December 1976), all Brazilian companies except the MEI – Small entrepreneur – are required to issue the report annually, always after the end of the calendar year – from January to December.

Generally, DRE is prepared in conjunction with the Balance Sheet and must always go through the signature of an accounting professional homologated by  CRC – Regional Accounting Council.

But this demonstration has an importance that goes beyond the legal obligation. In addition to meeting tax and accounting requirements, this control serves as a support for decision making and performance analysis of any organization.

What is the purpose of this report?

DRE aims to present the composition of the net result in a certain period, legally, of 1 year, but that by way of analysis can have shorter periods of recurrence.

As a document for the IRS, the DRE is the synthesis used by the government to verify that the tax calculations have been properly performed. Usually, the statement must be presented annually.

For the organization, as a direct benefit, DRE ends up functioning as an accounting tool that contributes to the verification of the financial health of a company, showing what the company’s result in profit or losses. With this control, there is a tool that summarizes financial control and helps managers get the real perspective of decisions made in the last calendar year. Therefore, it becomes easier to define administrative strategies for the business.

The KPIs generated by DRE allows an evaluation of the overall performance of the company, as well as the efficiency analysis of managers in achieving positive goals in their areas.

For companies seeking investments, such as startups, DRE is one of the keys to fundraising. Banks, Investment Funds and Credit Analysts can request this report as part of the study for the release and money application.

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The importance of DRE in Accounting Management

DRE is one of the principal accounting reports for treasury management, together with a Cash Flow Statement and the Balance Sheet. With this report, the company can measure its profit-generating potential for when necessary, to adjust business efficiency.

It is a very complete report that can provide numerous KPIs. With DRE it is possible to establish indicators of:

  • Gross Billing
  • Average Ticket
  • Net Income
  • Tax Expenses
  • Infrastructure Costs
  • Ebitda

How did you structure the DRE report?

The law is very clear as to how much information needs to be contained within the DRE. The exercise result statement shall contain:

  1. Gross revenue from sales and services, sales deductions, rebates, and taxes;
  2. Net sales and service revenue, cost of goods and services sold and gross profit;
  3. Sales expenses, financial expenses, income deductions, overhead and administrative expenses, and other operating expenses;
  4. operating profit or loss, other revenues, and other expenses;
  5. The result of the year before income tax and the provision for tax;
  6. The participation of debentures, employees, administrators, and beneficiary parties, even in the form of financial instruments, and institutions or funds of assistance, or employee pension, which are not characterized as an expense;
  7. The net profit or losses for the year and its amount per share of the share capital.

Therefore, to arrive at the information required by the government, several calculations are carried out in the construction of the DRE. Its basic structure implies the following steps:

  1. Submit gross revenue of sale and it subtracts all deductions and taxes. Thereby, there is net revenue for the period. 
  2. From net revenue, we subtract variable costs, such as expenses for goods. We then reached the Gross Margin.
  3. From the Gross Margin, operating expenses, administrative, financial and overhead expenses are subtracted, reaching EBITDA. Here, we include depreciation, amortization and exhaustion expenses, as well as other revenues and expenses. We achieved Net  Operating Results.
  4. With the Net OperResults in hand, we will deduct the expenses of IRPJ and CSLL, reaching the Net Income for the Year, the objective of the DRE.
(+) Gross Sales Revenues
(-) Deductions and Taxes
Result Net Revenue
(-) Variable Cost
Result Gross Margin
(-) Variable Expenses
Result Contribution Margin
(-) Personnel expenses
(-) Operating expenses
Result Ebitda
(-) Depreciation, Amortization and Exhaustion
(-) Other Revenues and expenses
Result Operating income
(-) Taxes (IRPJ and CSLL)
Result Net Income

Here, after understanding the traditional structure for the development of DRE, it is essential to understand the meaning of some calculations. Let’s take a little more look at some of them:

  1. Sales revenue: is all revenue generated from the sale of products and service or receipt of royalties.
  2. Taxes and deductions: are all taxation incidents in any sale transaction, such as ICMS, ISS, PIS and, etc. The Corporate Income Tax (IRPJ) and the Social Contribution on Net Income (CSLL) are also considered. 
  3. Net Revenue: gross revenue competes with tax and deduction discount;
  4. Gross Margin:  is the profitability of the business after-sales deductions (taxes, variable expenses, rebates, and discounts);
  5. Variable expenses: Variable expenses are costs that are not tied to the final product. An example: marketing and sales expenses.
  6. Contribution Margin: implies the portion of the profit from the sale of products and services that will contribute to the company’s structure expenses.
  7. IRPJ and CSLL: are taxes that directly affect the company’s profit, not applicable to companies operating with the National Simple tax regime
  8. EBITDA: is profit before interest and tax discounts, depreciation and amortization.
  9. Income for the year: loss or profit set after listing all expenses and revenues. When there is profit, there is the possibility of distribution of this amount between shareholders and other partners. 
  10. Net Income: This value represents the result of the company’s performance for the period, considering all gains and losses.

Of course, this model we’re quoting isn’t a rule. It only contemplates the basic information to meet the rules of the Tax Office. It is interesting if you consider your company’s business model, adapting information control for strategic measures that understand your company.

To realize a DRE that meets all government requirements and that effectively represents reality is fundamental that there is a control of absolutely all proofs related to the company.

Conclusion

Performing a recurring analysis of DRE is essential to visualize your company’s financial health. Thus, it is simpler to diagnose the origin of expense or bottlenecks in sales performance, for example. It is easier also to identify points that deserve greater allocation of financial resources —whether, for example, to improve products sold, or in the development and construction of the brand.

A good accounting advisory had performed the calculations accurately, listing all the items provided for by law for the preparation of a DRE. 

Also, it will bring aspects relevant to your business, which will contribute deeply to growth strategies, the aptitude of resources.

Find out how Accounting Advisory can contribute to your business decision-making by helping keep the house for fundraising attacks.