Understanding your accounts

This Understanding your accounts Info Guide explains the basics of three key financial tools – the Profit and Loss Account, the Budget Plan and the Cashflow Forecast.

Profit and Loss Account

What is a Profit and Loss Account?

Your Profit and Loss Account (P&L) is a tool that shows your income less your expenses. It:

• calculates the profit which your business has earned after allowing for all the expenses in running your business.
• records the transactions incurred by your business as a result of trading (the sales and purchases you make).
• shows you whether your business has made a profit or a loss over a financial year.
• tells you your contribution and net profit or loss.

Contribution

Contribution is the difference between the income which you earn from sales and the direct or variable costs of making those sales, before deducting fixed costs, such as overheads.

Contribution should first cover your fixed costs and the remainder is your net profit.

Net Profit or Loss

To find out what your business has earned or lost in a year, calculate your net profit by subtracting your total fixed costs from the contribution earned from sales.

If contribution doesn’t cover fixed costs fully, you are making a loss.
 

Profit and Loss Account: Guesthouse Example

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 related 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 neede 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 (calculates 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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Budget Plan

Prepare an Annual Budget which reflects your financial plan for the coming year. Use it to compare sales and costs with budgeted amounts throughout the year, ideally on a month-by-month basis.

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

This budget tool is additional to, but not a substitute for a Cashflow Forecast as cashflow, not profit, is ultimately the lifeblood of a business.

Profit and Loss Account Account actual results compared against Budget: Guesthouse Example

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,sesasonal) 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 schedules for later in year - bought this period	4. Other direct costs	1,000	400	-600	-150
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 month also	6. Staff costs (full-time)	2,500	3,000	500	16%
7. Overheads Overheads 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 to work out your expected profit


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Cashflow Forecast

What is a Cashflow Forecast?
Why do I need to prepare a Cashflow Forecast?
How to monitor your cashflow position

What is a Cashflow Forecast?

A Cashflow Forecast is a spreadsheet into which you enter your anticipated cash inflows and cash outflows for the next three months or for the forthcoming year in order to calculate your cash balance which will be either positive or negative.

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.

Why do I need to prepare a Cashflow Forecast? 

A Cashflow Forecast can also be used to support loan applications.

Cashflow Forecast Example
	January	February	March	Total
Cash inflow
Sales (incl VAT)	13,000	9,000	15,000	37,000
Other receipts		5,000		5,000
Total inflow	13,000	14,000	15,000	42,000
Cash outflow
Purchases (incl VAT)	3,500	3,000	4,000	10,500
Payroll – net pay	3,800	3,500	4,000	11,300
PAYE/PRSI	700	900	800	2,400
VAT	0	0	2,500	2,500
Loan repayments	5,000	5,000	5,000	15,000
Other payments		2,000	0	2,000
Total outflow	13,000	14,400	16,300	43,700
Net inflow/outflow	0	-€400	-€1,300	-€1,700
Opening cash balance - start of month	€1,000	€1,000	€600
Closing cash balance - end of month	€1,000	€600	-€700

 

How to monitor your cashflow position

Keeping on top of your cashflow position requires ongoing monitoring from you or your book-keeper. Your Cashflow Forecast should be a living tool that is rolled on from one week or month to the next with actual information providing the new starting point to project forward.

Weekly / monthly Cashflow Forecast review

1. Compare the completed period’s forecast figures with the actual cash movements, and revise the cash balance into the next period.

2. Update upcoming periods’ forecasts in the light of more accurate estimates and changes in the business environment.

3. Add future periods so that it becomes a rolling forecast.

• Quick Cashflow Forecast Calculator
• Use our Excel template to create an Annual Cashflow Forecast
• Use our Excel template to create a three-month Cashflow Forecast

 

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