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.

Your Profit and Loss Account tells you your:

Contribution
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: Activity Pursuits Example

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	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 costs 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 business 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 interst 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 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 investment in new equipment or building extensions	11. Net profit	€27,000

 
How do I calculate profit? ( Word version)

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Budget Plan

Prepare an Annual Budget Plan 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. This will help you identify any deviations from your financial plan, and allow you to take corrective action, if necessary.

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 & Loss Account actual results compared against Budget: Activity Pursuits Example

Profit and Loss Account actual resulsts compared against Budget: Activity Pursuits Example
			Actual	Budget	Variance	Variance
1. Sales Sales are €26,000 behind budget, mainly because of reduced customer numbers		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 - 25% 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 €2,000 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 that 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 fixed 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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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.

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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