The profit and loss account is a financial document that shows how much profit or loss a business has made for a period of time, usually one year. It contains a list of that generates money for the business i.e. sales and a list of factors that costs the business i.e. wages.
Using a profit and loss would be beneficial for me as at it can see how much profit or loss I have made over a period of time therefore if I see that my profit it steadily decreasing over the years, then I know there is something wrong as it will point it out. I can then do things to stop this from happening for example, I could reduce expenses and also try an increase sales. Doing this will not only improve my profit and loss account, but it will allow me to meet my objectives of decreasing expenses.
Another benefit it will have to my business is that it can be used to convince manager to give me a bank loan because they would want some reassurance that I will be able to pay the loan back and a profit and loss will be able to convince them for the reason that it shows how profitable my business is. If it shows that my business is making a good amount of profit, then they are more likely to give me a loan than if I was making little profit or maybe even a loss.
My profit and loss account contains figures gained from various documents I have created such as cash flow and my budget. Similar to me cash flow, my profit and loss if based on estimates therefore the figures can vary considerably.
The sales turnover figures on my profit and loss account was gather by quantity sold multiplied by my selling price. The quantity I expect to sell was gained through my sales forecast. In addition, my quantity sold was taken from my sales forecast. My sales forecast showed that I will gain 66 customers a day. I then multiplied this number by seven to get the amount of customers I will get a week which is 462, which I then multiplied by four to get the amount of sales I will get a month which is 1848 and then finally, I multiplied this number by twelve to get the amount of sales I will generate for the year which comes to 22,176. This number was then multiplied by my average selling price of ï¿½4.21 to get the sales revenue of ï¿½94,069.
Cost of sales is the amount it costs to makes the sales i.e. the raw materials. The figure of this was gained through my cash flow forecast and I have estimated that over the course of my first year, I will spend ï¿½39,577. The cost of sales in my case would include burgers buns, pizza toppings, cheese, burger fillings etc. Over the years this figure will increase as my business increases in popularity through customer loyalty, promotions and advertising and also thorough expansion which I will do as I generate more revenue from my business.
Gross profit is the amount of money I have made before any expenses are deducted and is calculated by taking the cost of sales from the sales turnover. Even though this may be high, it doesn’t take into consideration any expenses therefore, it doesn’t show how well my business is doing. My profit and loss account shows that I will make ï¿½84,512 gross profit in my first year of trading. This is extremely high because my cost of sales is fairly low however as mentioned before, gross profit means nothing until I have taken the expenses.
Expenses are the day-to-day cost of running my business. It includes factors that will be used when making the products such as electricity. The highest cost on my profit and loss account is wages which comes to ï¿½27,032. This figure is the lowest it can be because I am paying my staff minimum wages and I can therefore not pay them any lower. I will be employing four staff member to help me run my business and to help me make the products. This figure could have been lower but I have decided to give my employees a pay rise to motivate them to work harder however, this will only take place once my business starts to generate a decent amount of profit. If my employees are motivated then there are more likely to provide a higher customer service and this will then lead to more sales because my primary research shows that 90% of males ages 16 – 25 choose to go to the fast food restaurant they attend because of the customer service. As well as this, it will allow me to meet my aim of increasing customer satisfaction through my objectives of providing good customer service.
Furthermore, the second highest expense involved in my profit and loss is rent which comes to ï¿½22,000. The business premises I am buying is Mazza which located on Lady Margaret near Greenford High School. The ï¿½22,000 a year I think is a reasonable price because it because it means I have to pay ï¿½1,166 a month and based on my cash flow, it shows that this expense won’t seriously decreases my profit. As well as this, based on my primary research I have looked at various other locations and there price they are charging to lease their property is far more than what Mazza is charging for example, Spice World in Greenford Broadway charge ï¿½22,000 a year therefore I believe I have received a good price for the property
One crucial expense for my business is insurance. Without insurance I won’t have the reassurance that my business will be covered in case of any such as flood or earthquakes therefore I have decided to take out insurance on my business. The insurance has cost ï¿½145 a month therefore the figure I have entered for my profit and loss account is ï¿½1,740. Taking out insurance will save me in the long run because if my building or equipments get damaged then I won’t have to pay large sum of money to get it replaced because it will be paid for by the insurance company.
My equipments cost totals up to ï¿½4,791 and was gained from my primary research after researching different prices for each equipment and choosing the lowest price. By doing this it has allowed m to meet my aims of decreasing expenses which will lead to me meeting my aims of increasing profit and therefore will result in a better profit and loss account. The ï¿½4,791 figure in the profit and loss account in only entered once because I will only by them once so when I am creating next years or the years after, I won’t be required to enter this figure in. Buying it again would be unnecessary because the equipments I am purchasing will be capable of operating for a number of years and if I buy them every year, I will waste a lot of money. Based on this, my profit and loss account should be better next year.
Because my business is new, I have spent a fair amount of money on advertising because I want my business to get more well known by the public. By doing this I will be meeting my aims of increasing sales via my objectives of increasing the awareness of my business. The ï¿½1,667 spent on advertising will be used to buy and distribute leaflets and newspapers as well as get my advertisements published in local newspapers. I Have chosen to do this because my primary research highlights that 45% of males and 40% of females prefer advertising when asked the question ‘Which of the following most appeals to you?’ Another reason why I am doing this is because it would allow me to meet my objectives of raising awareness of my business which will result in meeting my aims of increasing sales which will ultimately lead to me meeting my aims of increasing profit.
I estimate that I will spend ï¿½480 on miscellaneous items. The will include items such as papers, pens, batteries cleaning cloths etc. I have included these items separately in the profit and loss account for the reason that there will be there will be numerous amounts of items and will result in the profit and loss account becoming fairly large. Another reason is that the figure for each of these items will be very low and I will most likely only by them once or twice therefore I can group all these items under one category which will make the profit and loss account easier to read and more organised.
Moreover, I will spend ï¿½3,280 on my bills. This bills for this bills includes every bills such as electricity, gas, water etc. This amount could have been slightly higher but in order to meet my aims of increasing profit, I will be required to decrease some expenses and one on the easiest expense to decrease is bills. I can do things such as turn lights and heating off when not in use and also I could unplug equipments when they are not being used for example the smoothie mixer.
Total expenses is calculated by adding up every figure in the expenses column and it shows that the total cost of the expenses I used for the year. My total expenses come to ï¿½60,990 which I believe to be very high. However, this should decrease over the years for the reason that I will spend less on advertising and I also I wouldn’t be required to purchase the equipment again.
Furthermore, net profit is calculated by subtracting the total expense from the gross profit. This shows how much money I have made over the financial year. At the end of the year, my net profit comes to ï¿½23,522. This is a quite good amount taking into consideration that my business has just started out. I believe this figure is likely to increase over the years because I am more likely to have more sales due to my business getting more well known, expansion and also due to an increase in promotion and advertising.
Retained profit is the amount of money after tax has been paid. The current business tax is 20% therefore I would be required to pay 20% of my net profit which comes to ï¿½4704.40. This will then leave me with a retained profit of ï¿½18,817.60 and using this money I will put most of it back into the business for future improvement and the rest will be used for personal use.
Although my retained profit is reasonably good, there are however a number of ways I can improve this for example I could hire less staff when my business has just started out then when my business get more popular and more well known by the public I could hire more staff to cope with the extra customers and to make take and create more orders. Doing this will improve my profit and loss as it means my wages expenses would decrease and therefore, will allow me to have more money to spend on other expenses. Another way I can improve my profit and loss account is to find cheaper suppliers. By doing this it will decrease my cost of sales which will improve my gross profit.
This will lead then increase my net profit which will then ultimately increase my retained profit. Not only will it improve my profit and loss account, but it will also allow me to meet my objectives of finding cheaper suppliers which will then allow me to meet my aim of increasing profit. Furthermore, I could lease back my equipment. This is when I sell one of my equipments for example my pizza oven and ten hire it back paying the new owner on monthly bases. Doing this will allow me to have large sum of cash at one time and then pay a portion to use it. The final way an can improve my profit and loss account is to try an increase sales for examples through increase advertising and promotions. By doing this, I will be meeting my aims as well as improve the figures in my profit and loss account.