Profitlossstatement

5.5 Finance

Profit & loss statement

PROFIT & LOSS STATEMENT

A: The story

In this exercise, the participants get acquainted with the profit and loss (P&L) state-ment format. They notice the importance of the use of P&L statement when project-ing the profitability of a business.

As introduction, the trainer gives a short explanation on Profit & Loss with some defi-nitions on the subject.

Afterwards, the trainer places two cards apart from each other on soft board: one

printed with “Sales” and the other with “Expenses”. The participants then receive the

“Transaction Cards” that are metaplan cards with examples either for a “sale” or for

an “expense” transaction written on them. They are then invited to place their cards in

the appropriate column on the soft board. The trainer then shows transparencies on

P&L format and calculation of raw materials used, to clarify some aspects, and then

proceeds to the next step.

In groups, the participants are requested to prepare another P&L exercise. The

trainer distributes one set of transaction cards for each group, and they will have 30

minutes to elaborate the P&L statement and also prepare a presentation.

After all works have been presented, they are asked to elaborate the first year of pro-jected P&L by generating realistic assumptions.

In processing this exercise, the trainer must look for any difficulties that may remain

by the end of the explanations and make every effort to clarify them. He should rec-ommend the participants to start preparing their projected P&L statement for their

proposed individual businesses.

It is the introductory exercise for the “Cash Flow” exercise.

This exercise is applied in the financial module of business plan courses.

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5.5 Finance

Profit & loss statement

B: Basic information

Objectives of learning

Basic objectives to be The participants

achieved by participants

 gain awareness of the need to use profit and loss (P&L)

statement in projecting the profitability of their proposed

businesses;

 organise income and expenses into P&L format;

 formulate realistic business assumptions.

Additional objectives of a The participants

higher level depending

 assess the project profitability of their proposed busi-on the situation and the

nesses based on field data gathered and conventional

current conditions of the

P&L methods.

target group

Uses

Financial management, business plan preparation

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5.5 Finance

Profit & loss statement

C: Further Information

Time

Preparation of rooms

Requirements

Trainers/assistants

Didactic aids to prepare

One trainer

 four sets of “Transaction Cards” (annex 1);

 transparencies for P&L lecturette (annex 2);

 P&L format transparency (annex 3)

Materials for the trainers

 soft boards

(during the exercise)

 flip chart

 overhead projector

 transparencies

Materials for the partici-pants (during the exer-cise)

Important conditions of

the room

 metaplan cards

 marker pens

spacious enough for the size of the group

2h 30’

chairs in U-shape formation

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5.5 Finance

Profit & loss statement

D: Learning Process Overview

Step

Lecturette on

P&L

Allocation of

Transaction

Cards

Discussion on

P&L format

New P&L exer-cise

Time

15’

20’

15’

30’

Most important contents

Give basic knowledge on subject

The trainer distributes transaction cards and partici-pants have to place them in the appropriate column

(either “sales” or “expenses”)

Using transparencies (annex 3) to discuss the P&L

format

Participants make a new P&L statement on their own

and prepare a presentation

Groups present their statements (five minutes per

group)

Participants make the first year projected P&L for one

company

Highlighting the main points of the subject, clarifying

doubts that may persist

P&L presentation 20’

Projected P&L

Processing

Generalising

20’

30’

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5.5 Finance

Profit & loss statement

E: Integrated Learning Process Organisation (ILPO)

Step Time Most Important Contents Activities

of Trainer

Range of Required Hints

Possible Materials

Activities of

Participants

listening The trainer introduces the exer-cise as an opportunity to improve

the participants' business plans.

Introduction 2' To motivate participants explaining

Lecturette

on P&L

13’ To give the basic knowledge on

the subject

explaining,

asking

questions

listening, an-swering

transpar-The trainer may solicit some defi-encies nitions of P&L from the partici-(annex 2) pants.

The trainer points out that this

section will focus the projected

P&L statement.

He states that the goal is not to

make the participants account-ants, but for them to learn the ba-sic knowledge allowing them to

effectively interact with their hired

accountant in the future.

transac-There should be enough cards for

tion cards all participants.

(annex 1)

Distribution 5’

of Transac-tion Cards

The trainer places two cards on

soft board, one printed with

“Sales” and another with ”Ex-distributing, listening

explaining

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5.5 Finance

Profit & loss statement

Step Time Most Important Contents Activities

of Trainer

Range of Required Hints

Possible Materials

Activities of

Participants

penses”.

The trainer distributes to the par-ticipants paired cards, each one-showing either a “sale” or an

“expense”.

He explains the participants they

shall allocate their cards prop-erly, either below the “Sales”

card or the “Expenses” card.

Allocation of 15’

Transaction

Cards

One at a time, the trainer asks

the participants to pin their cards

in the appropriate column on the

soft board.

Every time a card is being

pinned, he inquires from the oth-ers whether the clustering was

appropriate or not.

Finally, when all the cards have

been pinned, request participants

to calculate the total “Sales” and

“Expenses”.

stimulating

participation

on the exer-cise, inquir-ing

allocating

cards, an-swering ques-tions, calculat-ing

soft

board;

transac-tion cards

The trainer should stimulate eve-ryone to participate, asking if clus-tering was appropriate and stimu-lating discussion about it.

It is important to explain that in

preparing P&L statement, both

cash and credit transactions are

considered. Hence, cost of goods

sold includes both credit and

cash, purchase of materials, sup-plies etc. Likewise, sales will in-clude both cash and credit sales

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5.5 Finance

Profit & loss statement

Step Time Most Important Contents Activities

of Trainer

Range of Required Hints

Possible Materials

Activities of

Participants

for the specified period.

Discussion

on P&L

format

15’ The trainer presents a transpar-ency to discuss P&L format.

presenting listening, ask-overhead It is important to clarify that cost of

transpar-ing questions projector; goods sold consists of direct la-ency, asking transpar-bour, direct materials and factory

questions, encies overheads used in producing the

clarifying from an-goods sold.

doubts nex 3

The raw materials used need to

be calculated according to the

method shown on transparency 2

of annex 3.

forming

groups, dis-tributing

transaction

cards, ob-serving

discussing,

preparing P&L

statement

presentation

four sets

of trans-action

cards;

flip charts,

metaplan

cards;

marker

pens

The trainer takes control of time in

order to avoid delays.

The trainer does not interfere with

group work, but is available to

clarify doubts.

New P&L

exercise

30’ The trainer invites the partici-pants to do another P&L exer-cise.

He forms four groups and asks

each group to name their com-pany and select a secretary.

The trainer distributes one set of

transaction cards (annex 1) per

group and requests them to pre-pare the P&L statement.

Participants are informed that

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5.5 Finance

Profit & loss statement

Step Time Most Important Contents Activities

of Trainer

Range of Required Hints

Possible Materials

Activities of

Participants

they have to present their P&L

statement to the others.

The trainer gives time overview:

30 minutes to prepare every-thing; 5 minutes for each group

to present their work.

P&L pres-entation

20’ The groups present their state-ments.

observing presenting,

listening

materials

prepared

on previ-ous step

P&L gen-erated on

previous

step

Each group has 5 minutes for

presentation.

The trainer takes control of time in

order to avoid delays.

Encourage the groups to make

their assumptions on price of

goods, labour, raw materials utili-ties and so on.

Projected

P&L

20’ The trainer requests the partici-pants to make the first year pro-jected P&L by generating realis-tic assumptions.

observing making realis-tic assump-tions, discuss-ing and pro-jecting P&L

statement

answering

and discuss-ing

Processing

20’

Key questions

 Did you encounter any difficul-ties when preparing P&L

statement? What were they?

asking the

key ques-tions; taking

notes on

flip charts Request participants to list terms

difficult for them to understand.

Ask volunteers to clarify the

meaning of those terms.

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5.5 Finance

Profit & loss statement

Step Time Most Important Contents Activities

of Trainer

Range of Required Hints

Possible Materials

Activities of

Participants

The trainer refers the participants

to the “Do your own Business

Plan” Manual, which provides an

excellent example for preparing

projected P&L statement.

Generali-sing

Synthesis

10’

 Did you encounter any difficul-soft board

ties when preparing projected

P&L statement?

What were they?

The trainer asks the participants

to start preparing their projected

P&L statements for their pro-posed individual businesses.

See list of articles referring to this

subject

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5.5 Finance

Profit & loss statement

F: Hints for preparation, typical situations and dangers

If there are accountants in the group of participants, ask them to act as “observers” or

even “coaches” during the P&L exercise.

The results of the exercises should be typed and distributed to the participants after

the session.

It is possible to present the assumptions to be made on the “Projected P&L” Step,

previously prepared on metaplan cards, according to examples given in annex 4.

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5.5 Finance

Profit & loss statement

G: Variations

1) Alternative uses and objectives

None.

2) Minimising/Maximising

None.

3) Substitutions

A ready-made case study may be used instead of the exercise.

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5.5 Finance

Profit & loss statement

H: Annexes

Session

Document

Annex 1 Profit & loss statement

Transaction Cards

Factory Rental

Gasoline

Sales Return

Stock of Materials as per January 1, 1998

Salaries

Repair and Maintenance

Raw Materials Purchased on January 4, 1998

Wages Paid

Transport Rental

Tools and Fittings

Electricity and Water

Insurance for 1998

Stock of materials as per January 31, 1998

Telephone Expenses

Communication (Telex, Fax, Postage, Telephone)

Monthly Interest (beginning February 1, 1998)

Monthly Cash Sales

Annual Depreciation

Consultant’s Fees

Auditor’s Fees

Bonus Paid

Other Costs

Office Supplies

Promotion Costs

Commissions Paid

1,000

300

500

10,000

4,000

400

10,000

2,000

1,600

5,000

5,000

6,000

5,000

1,100

900

625

50,000

2,500

400

600

1,300

200

800

650

2,300

Note: Four sets must be prepared with varying values. Each transaction should be

written in one metaplan card. Unless otherwise specified, all figures are based on

monthly estimates in US dollars.

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5.5 Finance

Profit & loss statement

Transparency

Annex 2 Profit & loss statement

PROFIT & LOSS

“The difference between Sales and Expenses of an enterprise over a

given period of time”

If this difference is positive, it is called PROFIT, if it is negative, it is

called LOSS.

Statement prepared either before or after a given business period.

Before



Projected Profit & Loss

After

 Actual Profit & Loss

THE PROFIT & LOSS STATEMENT IS IMPORTANT FOR:

Stockholders: to take notice of operational results of business;

Bankers: to check business profitability, in order to comply (or not) with

their investment requests;

Business Managers: to check the efficiency of their business strategies

and to take proper actions, if necessary.

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5.5 Finance

Profit & loss statement

Transparency

Annex 3 Profit & Loss Statement

Profit & Loss Format

P&L Statement

CEFE Company

For the year ended December 31, 1998

Sales

Less: Cost of Goods Sold

Gross Profit

Less: Other Expenses:

Office Rent (50)

Selling & Administration (20)

Depreciation of Office Equipment (50)

Staff Salaries, etc. (130)

Operation Profit

Less: Interest Expenses

Net Profit before tax

Less: Tax (10%)

Net Profit after tax

1,000

(500)

500

(250)

250

(25)

225

(22.5)

202.5

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5.5 Finance

Profit & loss statement

Transparency

Annex 3 Profit & loss statement

(Transparency 2)

Calculation of Raw Materials Used

Raw Materials Purchased (in a period)

Add: Beginning stock of materials

Less: Ending stock of materials

Raw Materials used:

200

100

(50)

250

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5.5 Finance

Profit & loss statement

Session

Document

Annex 4 – Profit & Loss Statement

Assumptions for Projecting P&L Statement for the First Year

(Projected P&L Step)

Prices of goods will increase by ten percent.

Labour cost will increase by 15 percent as a result of recent announcements by

labour unions.

Raw materials will increase by five percent.

Electricity, water and telephone will increase by five percent.

Salary of entrepreneur will increase by 15 percent.

a)

b)

c)

d)

e)

Note: Each assumption should be written on one metaplan card for clarification

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