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. 

top

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 which you take in from sales of food and beverages (excl. VAT)	1. Sales
	Food	700,000
	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 which 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) Cost 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, 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 business 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 and 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 (caluclated 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)

top

Budget

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

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.

How do I compare my Profit and Loss Account (P&L) 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 corrrective action, so that your target profit will be achieved.

Profit and 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	52,000	-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 schedules 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 €4,000 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 that 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 15% 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)

top

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

top