NET PROFIT 211
Provisions for future payments to employees (such as pensions, redundancy
and terminations pay) and bad debts are often covered by statutory regulations.
Remember though that no money changes hands when the provisions are created
by a stroke of the book-keeping pen – and when they are paid out there is no
entry on the profit and loss account.
Sub-contracting work or paying service fees can be ways of shifting money from
one business to some other favoured firm. Moreover – since accounts can show
only payments actually incurred – outsourcing increases costs. The third party’s fee
will include a profit that would have been a saving if you had done it yourself. You
cannot show savings in the profit and loss account – only actual spending.
Timing errors can build a useful cash reserve. Getting the seasonal pattern
wrong was discussed earlier. Accruals accounting is another way that this can be
achieved – an entry goes in the cash flow account as a cost early on but the cost
can be treated as an accrued cost for a few months.
Net profit
Having worked through your operating costs, you will have built up a table that looks
similar to Figure 9.4. You will possibly have one of these for each functional area – produc-
tion, marketing, etc. The one for production costs goes into cost of sales (see Figure 9.6) as
discussed in Chapter 8.
The final monthly versions for the next year are likely to become your budgets, your
detailed financial operating plans. They belong in the annexes to your business plan,
together with a line-by-line commentary (Figure 9.5 shows an example extract). This is
too detailed for the main body of the business plan, where you will want a brief summary,
and this is explained in Chapter 10.
The gross profit from Chapter 8 and operating costs considered here take you to net
profit. An example of how it all pulls together into a profit and loss account is shown in
Figure 9.7. Again, notice that there is no new data to enter, this is just a collection of num-
bers from your earlier work.
However, although you have arrived at net profit, this chapter is not over quite yet. There
are a few additional items to consider. You see, it all depends what you mean by ‘net profit’.
‘The bigger the headquarters the more decadent the company.’
SIR JAMES GOLDSMITH
212 CHAPTER 9 GETTING TO NET PROFIT
Figure 9.4 Operating costs at the back of the business plan
TETRYLUS BUSINESS PLAN Doc 20110136 Annex A. Financial Projections
TETRYLUS Inc Financial plan,
Operating costs, first six months
Dollars
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 H1
E-11 Premises rental & taxes 1 000 1 000 1 000 1 000 1 000 1 000 6 000
E-12 Amort’n - lease improvem’ts 0 542 542 542 542 542 2 708
E-13 Utilities – electricity, etc. 500 500 500 500 500 500 3 000
E-10 TOTAL OCCUPANCY 1 500 2 042 2 042 2 042 2 042 2 042 11 708
E-21 Dep’n - office furniture 0 83 83 83 83 83 417
E-22 Dep’n - office equipment 0 0 0 13 13 13 38
E-23 Small equipment 100 100 0 0 0 0 200
E-24 Stationery & printing 100 25 25 25 25 25 225
E-25 Dues & subscriptions 100 100 100 100 100 100 600
E-26 Books & periodicals 50 50 50 50 50 50 300
E-27 Other office 50 50 50 50 50 50 300
E-20 TOTAL OFFICE 400 408 308 321 321 321 2 079
E-31 Dep’n - coms equipment 0 0 0 0 0 0 0
E-32 Telephone & fax 2 500 2 500 2 500 2 500 2 500 2 500 15 000
E-33 Information services 100 100 100 100 100 100 600
E-34 Postage & courier 250 250 250 250 250 250 1 500
E-30 TOTAL COMS 2 850 2 850 2 850 2 850 2 850 2 850 17 100
E-41 Depreciation - computers 0 556 597 597 625 625 3 000
E-42 Depreciation - software 0 208 208 208 208 208 1 042
E-43 Other software licences 500 0 0 0 0 0 500
E-45 Computer consumables 50 50 50 50 50 50 300
E-40 TOTAL COMPUTERS 550 814 856 856 883 883 4 842
E-51 Product distribution 0 0 500 1 000 300 2 500 4 300
E-52 Brochures and printing 0 5 000 2 500 0 0 0 7 500
E-55 Promotional items 0 2 500 0 0 0 0 2 500
E-59 Other marketing 0 5 000 5 000 0 0 0 10 000
E-50 TOTAL MKTG & SALES 0 12 500 8 000 1 000 300 2 500 24 300
E-61 Depreciation – vehicles 0 0 0 0 0 0 0
E-62 Rental – vehicles 0 0 0 0 0 0 0
E-63 Motor vehicle expenses 0 0 0 0 0 0 0
E-64 Travel & subsistence 5 100 10 100 10 100 10 100 10 100 10 100 55 600
E-65 Entertainment 0 0 0 0 0 0 0
E-60 TOTAL TS&E 5 100 10 100 10 100 10 100 10 100 10 100 55 600
E-71 Audit fees 0 0 0 0 0 0 0
E-72 Legal fees 1 000 2 500 1,000 0 0 0 4 500
E-75 Other professional fees 0 0 0 0 0 0 0
E-70 TOTAL PROFESSIONAL 1 000 2 500 1 000 0 0 0 4 500
E-83 Insurance 1 000 2 500 0 0 0 0 3 500
E-85 Sundry expenditure 100 100 100 100 100 100 600
E-80 TOTAL OTHER 1 100 2 600 100 100 100 100 4 100
E-00 TOTAL EXPENDITURE 12 500 33 814 25 256 17 268 16 596 18 796 124 229
Copyright © 2011 TETRYLUS Inc Page A6 of A10
NET PROFIT 213
Figure 9.5 Expenditure commentary at the back of the business plan
TETRYLUS BUSINESS PLAN Doc 20110136 Annex A. Financial Projections
ANNEX A.1 Commentary on the expenditure details
A.1.1. Staff costs
Line S-00 – Total salaries
Total spending on salaries is based on headcount projections and
expected salary levels (as described on page 45).
Line S-11 Director stipends
There is a modest $10,000 a month to cover the directors’ basic liv-
ing costs and commitments. They will be increased towards market
levels once the business is generating sustained positive cash flow.
Line S-12 Deliberately omitted
Line S-13 Contract staff
To avoid the commitment associated with increasing the permanent
staff complement, and to add to the range of resources available, a
number of technical staff will be employed on a contract basis. Their
costs are shown on page 45 and the total is included in line S-13.
…
A.1.2. Operational expenditure
Line E-11 Premises rental and taxes
We have a one-year lease on office premises at 115 High Road. This is
fixed at $12,000 for the period and it is payable in advance commenc-
ing in month 1.
Line E-12 Amortisation – leasehold improvements
This is the initial office fitting costs (described on page 88) written off
over the 12-month term of the lease.
Line E-13 Utilities
We estimate that spending on electricity and water will average a
little over $500 a month. There will be an annual price increase in
month 11 – we have provided for the maximum likely rise of 10%.
….
Copyright © 2011 TETRYLUS Inc Page A1.1 of A10
This might not be
exciting reading, but it
is a straightforward
commentary that allows
readers to understand the
basis behind the financial
projections.
The directors are
trying to make it look
as if they are being rea-
sonable. Many
venture capital
providers will not
back a project unless
the managers are well
paid enough to be
able to focus 100% on
the business.
Another good sign of sen-
sible planning – minimising
commitments during
the start-up period.
The detail (see
Figure 9.4) has many
‘straight-line’ entries
with the same
spending in each
month. I might have intro-
duced a seasonal pattern
here – not
because it makes
much difference to
the forecast, but
because it shows that
some thought has
been taken.
214 CHAPTER 9 GETTING TO NET PROFIT
‘Trust in Allah but tie up your camels, as the old Arab proverb says.’
Figure 9.6 Costs in the profit and loss account
Profit and loss account
Sales
Less
Cost of sales
Raw materials, components,
finished goods, salaries, other
production costs
Equals Gross profit
Less
Marketing and sales
Salaries, distribution,
advertising and promotions,
telecoms, travel, etc.
Research and development
Salaries, scribbling pads,
donuts, laboratory costs, etc.
Administration costs
Directors’ fees, staff salaries,
computer printout paper,
accounting fees, etc.
Equals Net profit
Gross
profit
Cost
of
sales
Sales
Net
profit
Operating
costs
Costs … and where they show in the …
Production
costs
Operating
costs
‘In that case, I’ll have a new carpet please’
One of the nightmares of corporate life (apart from back-stabbing, incompetence,
inertia and other routine pleasures) is trusting someone to prepare a budget and
operate within it sensibly.
The first problem is that one year’s spending is invariably the basis for the
following year’s. Of course costs are rising (inflation, extra activity and so on). So we
add a little – say 10%. And then at the end of the exercise we add a bit more to
cover contingencies – say, another 10%. This has added 20% to projected costs in
the blink of an eye.
t
NET PROFIT 215
Then, towards the end of the next year, when spending is running well below
this generous budget, there is a sudden spending frenzy – maintenance is down,
I’ll have a new carpet, with all these unspent professional fees I can commission a
salary survey and see how much I could earn if I changed jobs, and so on. Strangely,
entertaining and travel rarely run below budget (if ever). As a result of all this, next
year’s spending comes in very close to budget, so you add another 10% + 10% and
off you go again – setting precedents for ruin.
How do you control this? Some companies resort to zero-based budgeting,
where you hide the results of the current spending frenzy and make executives
start with a blank sheet of paper. Others indulge in periodic, often damaging cost-
cutting exercises. Frankly, though, it’s down to having responsible management
and keeping a close eye on what they do.
Figure 9.7 Profit and loss at the back of the business plan
TETRYLUS BUSINESS PLAN Doc 20110136 Annex A. Financial Projections
TETRYLUS Inc, Financial plan
Profit and loss account, first six months
Dollars
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 H1
Sales 0 20 000 0 40 000 0 50 000 110 000
Less: Cost of sales 0 13 591 0 27 183 0 33 979 74 753
Gross profit 0 6 409 0 12 817 0 16 021 35 247
Less: Operating costs
Employee costs 25 879 27 128 27 128 28 411 28 420 29 194 166 161
Other expenditure 12 500 33 814 25 256 17 268 16 596 18 796 124 229
Total operating costs 38 379 60 942 52 384 45 679 45 016 4 7990 290 390
Net profit (loss) (38 379) (54 533) (52 384) (32 862) (45 016) (31 969) (255 143)
before contingency etc.
Less: Contingency 3 838 6 094 5 238 4 568 4 502 4 799 29 039
Net profit (loss) (42 217) (60 627) (57 622) (37 430) (49 518) (36 768) (284 182)
before interest and tax
This requires your judgement This is operating costs
from Figure 9.4
This comes from your sales
forecasts – see Figure 8.8 This is from employee costs
from Figure 9.3
… all the rest is arithmetic
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