Setting profit goals and striving to achieve them would be pointless if there were no means of checking results against targets. This is one of the fundamental reasons for the need to have a system by which profit (and/or loss) can be reported regularly. The other basic reason, other than statutory reasons, for the reporting of profit is that a business owner is entitled to be informed periodically on the health of the business.
Accountants use a variety of report types in the reporting of profit. Common to all businesses is one report type, the 'profit and loss statement', used universally for this purpose.
The profit and loss statement concerns the whole business operation, not an individual transaction or project, over a period of time, most commonly a financial year. It can be presented in a relatively simple statement, showing income and expenditure for the chosen period and the difference between them.
A simple example of such a statement is:
Profit and loss statement for period
| Income | Expenditure | |
| Fees earned: | ||
| $197,000.00 | ||
| Rent | $11,500.00 | |
| Salaries | $112,625.50 | |
| Other expenses | $19,725.20 | |
| Profit | $53,149.30 | |
| TOTALS | ||
| $197,000.00 | $197,000.00 |
Additional statements could be further produced for months, quarters, half-years or for periods related to salary periods.
Another example:
Profit and loss statement for period
| Income | ||
| Professional fees | $403,000.00 | |
| Investment interest | $1,918.76 | |
| $404,918.76 | ||
| Expenditure | ||
| Salaries | $165,030.50 | |
| Rent, utilities and cleaning | $39,000.00 | |
| Insurances | $12,000.00 | |
| Staff training | $9,040.66 | |
| Stationary, office supplies | $8,891.00 | |
| Marketing, communications and business development | $45,444.20 | |
| Other | $39,040.88 | |
| $318,447.24 | ||
| NET PROFIT | $86,471.52 |
Although the profit and loss statement is the universal means of reporting profit and loss, the precise format is variable, depending on the nature of the expenses, outgoings and incomes of the particular business and the advice of its accountant.
Expressing the profit
Many items of expenditure cover more than one reporting period. Some items are so small that it does not really matter if they are reported as expenditure in only one period. In cases of other expenses identifiable with more than one period, a decision has to be consciously made as to which period or as to proportioning the items over the periods. This also applies to income identifiable with more than one period. In nearly every kind of business, such decisions must be made if the profit or the loss for each period is to be accurately identified.
Profit can be expressed in a variety of ways depending on context or the practice’s management policy. Profit can be shown as a lump sum, a rate per unit of time, production, personnel, etc or a percentage.
Profit expressed as a percentage is meaningless unless everything is carefully defined. The practitioner who boasts of 25% profit can convince no one unless the question, ‘25% of what?’, is answered. Refer to the following example:
| Staff costs | $40,000.00 |
| Overheads | $40,000.00 |
| Profit | $20,000.00 |
| Fees | $100,000.00 |
The profit here may be expressed as:
- 20% of income
- 25% of costs
- 50% of staff costs
- 50% of overheads
and all four different expressions would be correct. (Exactly the same profit may also be expressed as $5000 per person or $600 per week or whatever is appropriate to you). The first of these four is probably the most common in architectural practices, ie as a percentage of fee income but many businesses have profit-producing income other than fees, in which case the profit definition may well be in some other form.
Profit as 'salary'
Profit and salary are obviously two different things and clearly never interchangeable. However, there are good reasons why sometimes a profit income, or part of it, is treated as if it were a salary, or regarded as a 'notional' salary. This is an especially useful tactic in partnerships and sole proprietorships, which, unlike companies, cannot employ their owners. This is especially useful in budgeting because it allows the owners to plan for a reasonable income for themselves, as distinct from and in addition to, income to the practice which they own.
Whether or not it works out as planned at the end of the budget period depends on many factors. Invariably, the result is not exactly as budgeted and therefore some adjustment is necessary at the end, either to the notional salary or to the practice profit or to both. The notional salary can be used for calculation or hourly cost rates and for the salary component of hourly time-charge fees, as can any salary expended on productive work.
The concept of notional salary requires acceptance of the distinction between the owner and the business, as completely separate entities, as explained above. In the case of companies, the owners can be true employees of the company, earning true salaries. In architectural companies, the owners (shareholders) are invariably also employees (Directors). Profit sharing is therefore a completely separate activity and there is no need for a notional salary adjustable according to the eventually earned profit.
For information on different business structures and their features, refer to the Acumen notes Partnerships, Proprietary companies and Sole practitioners.
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