Profit basics

This Profit basics Info Guide shows you how to use your Profit and Loss Account to calculate your profit. It also tells you how to use other tools such as a Cashflow Forecast, a Budget Plan and a Break-even Point Calculator to manage your profits.
 

Profit

Profit is simply the difference between your business income and your business costs. If your income is greater than your costs you will make a profit, if not you will make a loss. 



Profit is essential to your business survival. You need profit to expand and re-invest in your business, to repay loans and to provide a return to the business owners.

You can lose potential profits if you fail to carefully manage and monitor your sales and costs. 

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Difference between cashflow and profit

Profit and cashflow differ in three key ways:

1. Activity
2. Timing
3. Non-cash items
 

1. Activitiy

2. Timing

3. Non-cash items

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Profit and Loss Account

In order to work out your profit figure, you need to use a simple tool called a Profit and Loss Account (P&L). Your Profit and Loss Account shows the value of sales made less itemised costs, the result being your net profit. 

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How do I calculate profit?
 

This Profit and Loss Account example shows the various elements that are included when calculating profit.

Profit and Loss Account: Guesthouse Example
	Sales
1. Sales Income you take in from sales of bed-nights and food (excl. VAT)	1. Sales	150,000
	Less direct costs
2. Food costs Cost of ingredients for breakfast and other meals	2. Food costs	20,000
3. Staff costs (casual / seasonal) Costs of additional pay when you increase your staff numbers at busy periods, eg casual / seasonal staff, or overtime payments, for kitchen / cleaning assistance	3. Staff costs (casual, seasonal)	20,000
4. Other direct costs Crockery, linen and laundry, and other outgoings directly relateed to the service of your customers (excl. VAT)	4. Other direct costs	5,000
		45,000
5. Contribution towards fixed costs and profit Once your sales income has covered the direct costs of providing your service, the remainder pays for your fixed costs and what is left over is your profit	5. Contribution towards fixed costs and profit	105,000
	Less fixed costs:
6. Staff costs (full-time) Pay cost of the core staff needed to operate your guesthouse	6. Staff costs (full-time)	40,000
7. Overheads Costs incurred irrespective of the level of business done, eg rates, electricity, heating and insurance	7. Overheads	15,000
8. Advertising and promotion Expense of promoting your business, such as brochures, advertising and website maintenance (excl, VAT)	8. Advertising and promotion	2,000
9. Bank interest and charges Interest and charges on bank overdrafts, loans or equipment leases	9. Bank interest and charges	5,000
10. Depreciation Amount that the value of equipment or other assets reduces by in the year (calculated as a percentage of the original purchase price)	10. Depreciation	3,000
11. Other expenses Other outgoings not included in the above headings	11. Other expenses	5,000
	Total fixed costs	70,000
12. Net Profit / Loss Sum of Sales less all direct and fixed costs. This is the amount that the business has left over for personal drawings, repayment of loans or investing in new equipment, furniture or building extensions.	12. Net profit	€35,000

 
How do I calculate profit? ( Word version)

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Tools to help you manage your profits
 

You will find it easier to manage your profits if you use a Cashflow Forecast and a Budget. You also need to compare your Profit and Loss Account against your budget.
 
 

Cashflow Forecast

Depending on the size of your business and its complexity, a Cashflow Forecast may be the only tool that you need to manage your profits.
 

• For more on cashflow forecasting, see Cashflow forecasting
• Use our Excel template to create an Annual Cashflow Forecast
• Use our Excel template to create a three-month Cashflow Forecast

Budget

Prepare an Annual Budget Plan and use it to compare sales and costs with budgeted amounts throughout the year, ideally on a month-by-month basis. This is additional to, but not a substitute for a Cashflow Forecast as cashflow, not profit, is ultimately the lifeblood of a business.
 

How do I compare my Profit and Loss Account against my budget?

Prepare your Budget for the coming year, analysed by month or quarter. Do the following throughout the year:

1. Compare your Profit and Loss Account figures (ie your actual results) against your Budget estimates.

2. Identify where your Profit and Loss Account figures differ from your budget estimates.

3. If necessary, take corrective action, so that your target-profit will be achieved.

Profit and Loss Account actual results compared against Budget: Guesthouse Example
		Actual	Budget	Variance	Variance
	Sales			€	%
1. Sales Sales are €3,000 behind budget this month, mainly because of reduced customer numbers   Action: Need to run promotion next month and review effectiveness of our website	1. Sales	10,000	13,000	-3,000	-23%
	Less direct costs
2. Food costs These costs have reduced in line with reduction in sales	2. Food costs	1,300	1,700	400	23%
3. Staff costs - casual, seasonal Casual staff costs have reduced more than the % drop in sales.   Action: Identify scope for further savings in casual staff costs in future months	3. Staff costs - casual, seasonal	1,000	1,700	700	41%
4. Other direct costs Additional crockery and glassware scheduled for later in year - bought this period	4. Other direct costs	1,000	400	-600	-150%
		3,300	3,800	500
5. Contribution towards fixed costs and profit Due mainly to reduced sales, we have -€2,500 less this month to cover our overheads and provide profit	5. Contribution towards fixed costs and profit	6,700	9,200	-2,500	-27%
	Fixed costs
6. Staff costs (full-time) Pay rate reductions this month will benefit future months also	6. Staff costs (full-time)	2,500	3,000	500	16%
7. Overheads Overheadss are below budget by €200 due to changing electricity supplier	7. Overheads	1,000	1,200	200	16%
8. Advertising and promotion Advertising is over budget by €300 Action: Need to ensure we are getting value for money on this	8. Advertising and promotion	300	0	-300	-100%
9. Bank interest and charges Additional bank overdraft interest paid this period due to drop in cash income	9. Bank interest and charges	500	400	-100	-25%
10. Depreciation Depreciation is as budgeted - OK	10. Depreciation	200	200	0	0%
11. Other expenses Overspend not material	11. Other expenses	200	100	-100	-100%
	Total fixed costs	4,700	4,900	200	4%
12. Net Profit / Loss Net profit is down due mainly to drop in sales offset by some savings in fixed costs	12. Net Profit / Loss	€2,000	€4,300	€-2,300	-53%

How do I compare my Profit and Loss Account (P&L) against my Budget? ( Word version)

Use our Budget template to estimate your sales and costs for the year and work out your expected profit

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