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 and a Budget Plan 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 Activity Pursuits Centre Profit and Loss Account example shows the various elements that are included when calculating profit.

Profit and Loss Account: Activity Pursuits Example
1. Sales The income you earn from activities provided to customers (excl. VAT)	1. Sales
	Sales	224,000
Less Direct Costs
2. Staff costs (casual, seasonal) The cost of additional pay when you increase your staff numbers at busy periods, eg seasonal instructors and guides, casual staff, or overtime payments	2. Staff costs (casual, seasonal)	52,000
3. Other direct costs Supplies, eg fuel, directly related to the service of your customers	3. Other direct costs	60,000
		112,000
4. Contribution towards fixed costs and profit Once your sales income has covered the direct costs of providing your services, the remainder pays for your fixed costs and what is left over is your profit	4. Contribution towards fixed costs and profit	112,000
Less fixed costs:
5. Staff costs (full-time) Pay cost of the core staff needed to operate your Activity business	5. Staff costs (full-time)	60,000
6. Overheads Costs incurred irrespective of the level of businesss done, eg rent and rates, electricity, heating and insurance	6. Overheads	12,000
7. Advertising and promotion Expense of promoting your business, such as brochures, advertising, website maintenance (excl. VAT)	7. Advertising and promotion	3,000
8. Bank interest and charges Interest and charges on bank overdrafts, loans or equipment leases	8. Bank interest and charges	4,000
9. Depreciation Amount that the value of equipment or other assets reduces by in the year (calculated as a percentage of the original purchase price)	9. Depreciation	3,000
10 Other expenses Other outgoings not included in the above headings	10. Other expenses	3,000
Total fixed costs		85,000
11 Net Pofit / 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 investment in new equipment or building extensions	11. Net profit	€27,000

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

Profit & Loss Account actual results compared against Budget: Activity Pursuits Example
		Actual	Budget	Variance	Variance
1. Sales Sales are €26,000 behind budget, mainly because of reduced customer numbers  Action: Need to run a more targeted promotion and improve our upselling skills	1. Sales	224,000	250,000	-26,000	-10%
Less Direct Costs
2. Staff costs (casual, seasonal) Casual / seasonal staff costs are proportionally greater than budget - 23% as against 20% of sales   Action: Need to organise staff deployment more efficiently	2. Staff costs - casual, seasonal	52,000	50,000	-2,000	-4%
3. Other direct costs Other direct costs are proportionally in line with budget. No action needed.	3. Other direct costs	60,000	65,000	5,000	8%
4. Contribution towards fixed costs and profit Due to reduced sales and more expensive casual / seasonal staff costs, we have €23,000 less this month to cover our overheads and provide profit	4. Contribution towards fixed costs and profit	112,000	135,000	-23,000	-17%
Fixed costs
5. Staff costs (full-time) Full-time staff costs are less this period due to a negotiated salary reduction   Action: Need to keep pay costs under review	5. Staff costs - full-time	60,000	65,000	5,000	8%
6. Overheads Overheads are over budget by €2000 or 33%, due to increased energy charges     Action: Need to source cheaper energy supplier	6. Overheads	3,000	1,000	-2,000	-200%
7. Advertising and promotion Advertising is over budget by €2,000. Additional promotions done to address falling sales.   Action: Need to ensure we are getting value for money on this spend	7. Advertising and promotion	12,000	10,000	-2,000	-20%
8. Bank interest and charges Increased bank overdraft interest this period due to timings of payments   Action: Need to forecast cashflow more accurately	8. Bank interest and charges	4,000	3,000	-1,000	-33%
9. Depreciation Depreciation is as budgeted - OK	9. Depreciation	3,000	3,000	0	0%
10. Other expenses In line with budget - OK	10. Other expenses	3,000	3,000	0	0%
Total fixed costs		85,000	85,000	0	0%
11. Net Profit / Loss Net profit is down due to drop in sales. Fixed costs in total are in line with budget, but individual costs need to be watched.	11. Net Profit / Loss	27,000	50,000	-23,000	-46%

 
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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