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.

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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: Restaurant Example
1. Sales Income you take in from sales of food and beverages (excl. VAT)	1. Sales
	Food	700,00
	Bar	350,000
		1,050,000
2. Cost of sales Cost of food and other ingredients, and cost of beverages, eg wine, beer, spirits, non-alcoholic (excl. VAT)	2. Cost of sales
	Food	280,000
	Bar	125,000
		405,000
3. Gross margin Sales less cost of sales, ie the direct profit you make by putting a mark-up on your food and beverage purchases	3. Gross margin
	Food	420,000
	Bar	225,000
		645,000
4. Staff costs - casual, seasonal Costs of additional pay when you increase your staff numbers at busy periods, eg casual/seasonal staff, or overtime payments	4. Staff costs - casual, seasonal	100,000
5. Other direct costs Crockery, glassware, linen and laundry, and other outgoings directly related to the service of your customers	5. Other direct costs	10,000
6. 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	6. Contribution towards fixed costs and profit	535,000
Less fixed costs:
7. Staff costs - full-time Pay cost of the core staff needed to operate your restaurant	7. Staff costs -full-time	250,000
8. Overheads Costs incurred irrespective of the level of businesss done, eg rent and rates, electricity, heating and insurance	8. Overheads	150,000
9. Advertising and promotion Expense of promoting your business, such as brochures, advertising, website maintenance (excl. VAT)	9. Advertising and promotion	20,000
10. Bank interest and charges Interest and charges on bank overdrafts, loans or equipment leases	10. Bank interest and charges	30,000
11. Depreciation Amount that the value of equipment or other assets reduces by in the year (calculated as a percentage of the original purchase price)	11. Depreciation	25,000
12. Other expenses Other outgoings not included in the above headings	12. Other expenses	10,000
Total fixed costs		485,000
13. Net profit 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, furniture or building extensions	13. Net profit	€50,000
14. Food gross margin % Food gross margin expressed as a percentage of food sales helps you monitor your control over food costs and mark-ups	14. Food gross margin	60.0%
15. Bar gross margin % Bar gross margin expressed as a percentage of bar sales helps you monitor your control over bar costs and drinks pricing	15. Bar gross margin %	64.3%
16. Payroll as % of sales Casual/seasonal and full-time staff costs expressed as a percentage of sales measures how efficiently you manage pay costs	16. Pay as % of sales	33.3%

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 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 & Loss Account actual results compared against Budget: Restaurant Example
		Actual	Budget	Variance	Variance
1. Sales Sales of Food and Bar are €11,000 behind budget, this month, mainly because of reduced customer numbers  Action: Need to run promotion next month and improve upselling skills	1. Sales
	Food	59,000	65,000	-6,000	-9%
	Bar	22,000	27,000	-5,000	-19%
		81,000	92,000	-11,000
2. Cost of sales Cost of sales is out of line with % drop in sales - some slippage in mark-ups   Action: Need to examine our gross margin % in 14 and 15 below	2. Cost of sales
	Food	21,000	20,000	-1,000	-5%
	Bar	7,000	8,000	1,000	13%
		7,000	7,000	0
3. Gross margin Overall gross margin is well down on budget, due to the drop in sales and slippage in mark-ups   Action: Need to examine our gross margin % in 14 and 15 below	3. Gross margin
	Food	38,000	45,000	-7,000	-16%
	Bar	15,000	19,000	-4,000	-21%
		53,000	64,000	-11,000
4. Staff costs - casual, seasonal Casual staff costs same as budget but should have reduced in line with sales	4. Staff costs - casual, seasonal	7,000	7,000	0	0%
5. Other direct costs Additional crockery and glassware scheduled for later in year - bought this period	5. Other direct costs	1,500	1,000	-500	-50%
6. Contribution towards fixed costs and profit Due to reduced sales and disimproved margins, we have €11,500 less this month to cover our overheads and provide profit	6. Contribution towards fixed costs and profit	44,500	56,000	-11,500	-21%
Fixed costs
7. Staff costs - full-time Full-time staff costs are more this month due to contract commitments   Action: Need to review all full-time contracts	7. Staff costs - full-time	26,000	21,000	-5,000	-24%
8. Overheads Overheads are below budget by €4000 or 33%, due to securing rent reduction from landlord and changing electricity supplier	8. Overheads	8,000	12,000	4,000	33%
9. Advertising and promotion Advertising is over budget by €1,000   Action: Need to ensure we are getting value for money on this	9. Advertising and promotion	2,000	1,000	-1,000	-100%
10. Bank interest and charges Small saving in bank overdraft interest this period	10. Bank interest and charges	2,000	3,000	1,000	33%
11. Depreciation Depreciation is as budgeted - OK	11. Depreciation	2,000	2,000	0	0%
12. Other expenses Overspend not material	12. Other expenses	1,100	1,000	-100	-10%
Total fixed costs		41,100	40,000	-1,100	-3%
13. Net Profit / Loss Net profit is down due to drop in sales and margins, as well as some increases in fixed costs	13. Net Profit / Loss	€3,400	€16,000	-12,600	-79%
14. Food gross margin % Down 5% on budget   Action: Chef needs to identify reasons and implement solutions	14. Food gross margin %	64%	69%	-5%
15. Bar gross margin % Down 2%   Action: Bar manager needs to identify reasons and implement solutions	15. Bar gross margin %	68%	70%	-2%
16. Payroll as % of sales Both casual and full-time payrolls are well over budget   Action: Need to watch deployment of staff and review employment contracts	16. Payroll as % of sales	41%	30%	-11%

 
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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