216 CHAPTER 9 GETTING TO NET PROFIT
Other income and expenditure
We are not quite finished. There is a small matter of other income and expenditure to con-
sider. There are four categories.
1 Contingency – an allowance for unexpected costs.
2 Investment income – primarily income on shares in other companies.
3 Interest – received on bank deposits and paid to bank.
4 Taxation.
WHY INCLUDE THEM?
The box opposite shows how they build up in the profit and loss account. You can also
look back at Figure 9.7 to see profit before contingency. Some people do not bother to
show this line. I think that it helps when you come to monitor spending against budgets
for the following reasons.
Contingency
You cannot predict the future with certainty. The contingency reserve provides a margin
for error. It is here so that you can legitimately inflate cash flow slightly – and spend more
than expected without exceeding the budget figure for profit after contingencies. You can
make the contingency a flat amount, or relate it to some other figures – such as 10% of
total operating costs. It is an entry that you include for planning and budgeting purposes.
It disappears as time passes, because it is either reallocated to costs or is unused. Watch
out for a spending binge on trivia at the end of the year if the unused contingency is not
carefully controlled.
Investment income
If you hold share capital or other investments in other businesses, you should be able
to estimate future income from these quite easily. You know what interest or dividend
payouts to expect. Where you have majority interests, you will instead consolidate the
accounts to show the combined profit and loss for the group.
Interest
This is easy. It will fall out of your cash flow projections, which are discussed in Chapter 10.