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 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. Activity

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: Other Accommodation Example
	Income
1. Letting income Income from letting rooms, self-catering units or caravan / camping pitches (excl. VAT)	1. Letting income	450,000
	Retail / food
2. Retail / food sales Income from shop, cafeteria or vending machines (excl. VAT0	2. Sales	100,000
3. Retail / food cost of sales Purchase of food, beverages, confectionary, equipment and other saleable items (excl. VAT)	3. Cost of sales	50,000
4. Gross margin This reflects the mark-ups you are earning on your sales of goods	4. Gross margin	50,000
	Service charges
5. Service charges to guests Where you charge separately for electricity, water and other supplies	5. Charges to guests	10,000
6. Service charges related costs The separately-metered costs incurred that you seek to recover from guests	6. Related costs	10,000
7. Service charge surplus / deficit Shows how successful you are in recovering metered costs from guests	7. Surplus / deficit	0
	Net income	500,000
	Less direct costs
8. Staff costs (casual / seasonal) Costs of additional pay when you increase your staff numbers at busy periods, eg casual / seasonal staff, or overtime payments	8. Staff costs (casual, seasonal)	120,000
9. Other direct costs Crockery, linen and other outgoings directly related to the service of your guests (excl. VAT)	9. Other direct costs	80,000
	Total direct costs	200,000
10. 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 profit	10. Contribution towards fixed costs and profit	300,000
	Less fixed costs
11. Staff costs (Full-time) Pay cost of the core staff needed to operate your business	11. Staff costs (full-time)	150,000
12. Overheads Costs incurred, eg rates, electricity, heating and insurance, irrespective of the level of business done (excluding any costs separately metered for re-charge to guests). Excl. VAT.	12. Overheads	30,000
13. Advertising and promotion Expense of promoting your business, such as brochures, advertising, website maintenance (excl. VAT)	13. Advertising and promotion	10,000
14. Bank interest and charges Interest and charges on bank overdrafts, loans or equipment leases	14. Bank interest and charges	30,000
15. Depreciation Amount that the value of equipment or other assets reduces by in the year (calculated as a percentage of the original purchase price)	15. Depreciation	10,000
16. Other expenses Other outgoings not included in the above headings	16. Other expenses	20,000
	Total fixed costs	250,000
17. Net Profit Sum of all income less all direct and fixed costs - the amount left over for personal drawings, loan repayments or investing in equipment	17. Net Profit	50,000

 
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 these three tools:

• Cashflow Forecast
• Budget
• Know your break-even point

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 your actual 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. Take corrective action if necessary so that your target-profit will be achieved.
 

Profit and Loss Account actual results compared against Budget: Other Accommodation Example
		Actual	Budget	Variance	Variance
		€	€	€	%
	Income
1. Letting income €5,000 behind budget this month, due to reduced prices and fewer customers	1. Letting income	35,000	40,000	-5,000	-13%
	Retail / food
2. Retail / food sales Reduction in line with letting income reduction   Action: need to improve our upselling skills	2. Sales	7,000	10,000	-3,000	-30%
3. Retail / food cost of sales Costs this month are out of line with the reduced sales value achieved   Action: Need to examine our mark-ups	3. Cost of sales	4,000	5,000	1,000	20%
4. Gross margin This has slipped from 50% (budgeted) to 43%, due to sales discounts and increased supplier prices Action: Need to review selling prices and re-negotiate prices with suppliers	4. Gross margin	3,000	5,000	-2,000	-40%
	Service charges
5. Service charges to guests Fewer service charges to guests this month due to drop in guest numbers	5. Charges to guests	1,000	2,000	-1,000	-50%
6. Service charges related costs Some metered costs only captured after guests had left, which could not be charged afterwards	6. Related costs	1,200	2,000	800	40%
7. Service charge surplus / deficit €8,200 of costs escaped re-charge.   Action: Need to improve our method of gathering metered cost information before finalising guest bills	7. Surplus / deficit	-200	0	-200	-100%
	Net income	37,800	45,000	-7,200	-16%
	Less direct costs
8. Staff costs (casual / seasonal) Flexible arrangements with staff achieved savings in light of downturn in income	8. Staff costs (casual, seasonal)	7,000	9,000	2,000	22%
9. Other direct costs Linen and other supplies, scheduled for later in year, bought this period	9. Other direct costs	9,000	6,000	-3,000	-50%
	Total direct costs	16,000	15,000	-1,000	-7%
10. Contribution towards fixed costs and profit Due to reduced sales and increased direct costs, we have €8,200 less this month to cover overheads	10. Contribution towards fixed costs and profit	21,800	30,000	-8,200	-27%
	Less fixed costs
11. Staff costs (Full-time) Pay reduction this month will also benefit future months	11. Staff costs (full-time)	12,500	13,000	500	4%
12. Overheads Savings €400 on budget estimate mainly due to change of electricity supplier	12. Overheads	2,100	2,500	400	16%
13. Advertising and promotion Overspent by €1,000 Action: Need to ensure we are getting value for this spend	13. Advertising and promotion	2,000	1,000	-1,000	-100%
14. Bank interest and charges Additional bank interest paid this period due to drop in cash income	14. Bank interest and charges	3,000	2,500	-500	-20%
15. Depreciation Depreciation is as budgeted - OK	15. Depreciation	1,000	1,000	0	0%
16. Other expenses Overspend not material	16. Other expenses	1,800	1,500	-300	-20%
	Total fixed costs	22,400	21,500	-900	-4%
17. Net profit / loss Profitability has disimproved by €9,100 this month, as against budget.   Action: Need to improve our promotional efforts, and the level and timing of all our costs	17. Net profit	-600	8,500	-9,100	-107%

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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