Nursery Management Understanding and Managing Finance Session 5.
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Transcript of Nursery Management Understanding and Managing Finance Session 5.
Nursery ManagementUnderstanding and Managing Finance
Session 5
The Profit and Loss Account
In Session 2 we saw an example of a Profit and Loss account for a day’s trading in at a car boor stall.
Before we see an example of a ‘real’ Profit and Loss account, we need to understand: the idea of revenue the idea of expenses
Further Financial Terms
Income – An amount of money which comes in to, or is earned by, the business during an accounting period - sometimes called Revenue
Turnover - total value of sales over a given period – this is sometimes called Income or Revenue Its likely that most of your income will be received by
parents/guardians
So what is actually meant by the term Revenue? Revenue – technically this simply refers to the inflow of
assets, or the reduction in claims that arise as a result of trading operations.
Financial Terms
• Expenditure – An amount of money which has been spent by, or goes out from, the business during an accounting period.
• Cost - the amount of actual or notional expenditure incurred on or attributable to a specified thing or activity (fixed, variable, direct, indirect )
The Format of the P and L Account
Normally a Profit and Loss Account will consist of:
Sales (Turnover)Less Cost of Sales
= Gross ProfitLess Overheads
= Net profitLess Interest on Loans
= Profit Before TaxLess Tax
= Profit after TaxLess Dividends
= Retained profit for the year
Terms on the Profit and Loss Account
Turnover: Total value of sales over a given period - sometimes called Income or Revenue
Cost of Sales: The costs incurred in caring for the children in a given period
Overheads: Other costs incurred in running the business, but not directly related to caring for the children
Interest on Loans: Money paid to lenders for the privilege of borrowing money.
Tax: Money paid to the government as a contribution to the National Exchequer.
Dividends: Money paid to shareholders(of a limited company) as a ‘reward’ for investing in the company.
Turnover
In early years settings this will usually be fees for services
Subscriptions Interest earned ( for example if you have money
on deposit at the Bank) To all intents and purposes,
Income = Revenue = Sales = Turnover VAT is excluded from Sales figures (and all
other figures)
Cost of Sales (Direct Costs) Costs which are directly related to the cost of providing
the goods or service (Cost of Sales)
For example: Goods purchased for resale(for example tee shirts advertising your crèche)
Direct Labour costsRaw materials, Packaging, Energy
Direct Costs often vary with sales (though some Direct Costs can be FIXED)
Overheads (Indirect Costs) Operating Expenses Costs which are not directly related to child care. Costs which are incurred even when an organisation
produces no output. Often Fixed Costs For example: Administrative salaries
Advertising, Stationery, Rent and RatesInsurance, Bank chargesDepreciation
Indirect Costs do not (necessarily) vary with ‘sales’ Interest usually shown later
Interest on Loans
Includes Interest on Bank loans and other formal loan
arrangements (e.g. debentures). These are normally charged at some fixed rate e.g. 12% of the loan
Interest on Overdrafts (rates may be variable), and more expensive (e.g. up to 15%)
Does not include Money paid to shareholders in dividends Interest charged by creditors for late payment
Tax
Corporation Tax is charged on profits made after all costs and interest charges (but not dividends) have been accounted for.
In the examples in the slides, a ‘flat rate’ of 20% is used, to simplify calculations
For more on tax in the UK consult:
http://www.inlandrevenue.gov.uk/rates/corp.htm
Dividends Limited companies are financed primarily through
shareholding. Shareholders buy shares in the company. These may
have a face value ranging anywhere from 1 penny to thousands of pounds.
At the end of each financial period, the directors of the company may decide to issue dividends. This is money paid to the shareholders out of net profit after tax , as a reward for their continued investment.
The dividend paid does not affect the face value of the share.
Profit or (Loss)
There are many different sorts of profit: Gross Profit = Sales less Direct Costs Operating Profit = Sales less Direct Costs less
Indirect Costs Profit before tax = Operating Profit less Interest Profit after tax = Profit before tax less tax Retained profit = Profit after tax less dividends
Activity 1
Which type of Profit specifically might you be interested in if you were: A Shareholder The Inland Revenue The Nursery Manager The Managing Director
Activity 1 solution
Which type of Profit might you be interested in if you were:A Shareholder All types of profit, but specifically profit after tax, and the
amount that the company has offered in dividends and the retained profit.
The Inland Revenue Profit before TaxThe Nursery Manager Normally Turnover and Gross ProfitThe Managing Director All types of profit, but specifically the Retained Profit, which
will be reinvested into the company.
Sample Profit and Loss Account• The next slide shows a profit and loss account for a company
over a one-year period.• The format varies according to the type of business, but there
is a fairly uniform convention to structure the accounts in the following way:
Total Income:Less expenditure item #1Less expenditure item #2Less expenditure item #3 etc.
= Earned Surplus (Profit)
Turnover (Sales) (Income) £ 100,000
Cost of Sales (Direct Costs)Materials £10,000
Transport £ 5,000
Labour £15,000
Total Cost of Sales £ 30,000 30%
Gross Profit (Gross Margin) £ 70,000 70%
Overheads (Indirect Costs)Administrative salaries £18,000
Depreciation £ 5,000
Rent and Rates £ 4,000
Total Overheads £ 27,000 27%
Operating Profit (Net Margin) £ 43,000 43%Interest on loans £ 3,000
Profit before tax £ 40,000 40%Corporation tax due £8,000
Profit after tax and interest £ 32,000 32%Dividends payable £22,000
Retained Profit (Earned Surplus) £ 10,000 10%
Depreciation Methods
There are two main methods used: Straight-line depreciation = Cost of item
divided by number of years over which it is to be written off
Reducing balance = Current value x Depreciation%
Activity 2
Discuss the following:
Why does an increase in cash in the bank during a particular accounting period not necessarily mean that the organisation has made a profit?
Why is it important to distinguish between capital and revenue expenditure?
Why is it important to differentiate between indirect and direct costs?
Activity 2 – Possible Solution
Increase in cash in the bank could be the result of: a loan, payment of a previous debt, selling off an asset, even selling goods at a loss!
None of these incurs profit.
Capital expenditure buys things still owned by the company. Revenue expenditure ‘disappears’.
Indirect costs need to be paid even if you don’t sell anything; in difficult times overheads need to be cut.