Preparation Of Profitability Statement

Profit is the parameter through which efficiency of a business unit is judged. It enables the businessman to measure his performance against the standards set. Profit is a guiding factor as businessman improves his performance by minimizing his expenses and improving his turnover. Profit also helps the investors, bankers, creditors etc. to form a positive opinion about the business unit. Profit is calculated by making a profitability statement.

In a project report, profitability statement plays a vital role. It gives the figures of profit which a project is expected to earn from year to year.

Shall we learn with a Example:


Following assumptions have been used for preparing the profitability statement:

• Gross sales and cost of raw material: To be obtained from statement of production, raw material consumed and gross sales (refer Practical Exercise 3).
• Other expenses have been assumed to be as under:
1. Packing material: 40% of cost of raw material.
2. Salary and wages: 25% of cost of raw material.
3. Power & fuel: (refer Practical Exercise 9).
4. General administration: Rs.2.00 lac in the first year. Thereafter, to be increased by 5% in the subsequent years.
5. Interest on term loan: 11.5% p.a. (to be applied on the average of opening and closing balance in each year).
6. Interest on working capital (WC) loan: 11.5% p.a. (refer Practical Exercise 4).
7. Depreciation (as calculated earlier - refer Practical Exercise 2).
8. Preliminary expenses to be w/off: One-fifth of total preliminary expenses of Rs.0.50 lacs (i.e. Rs.0.10 lacs) to be written off in each year.

Based on the above assumptions, profitability statement has been prepared as under.

Sl. No.	Particulars	Year
		I	II	III	IV	V
I.	Income
	Gross Sales (Rs. in lacs)	106.00
	Total Income	106.00
II.	Expenditure
	Cost of Raw Material	53.53
	Packing Material	21.41
	Salary & Wages	13.38
	Power & Fuel	2.46
	General Administration	2.00
	Interest on Term Loan	1.55
	Interest on WC Loan	1.79
	Depreciation	0.91
	Preliminary Expenses W/O	0.10
	Total Expenditure	97.14
III.	Operating Profit (I−II)	8.86
IV.	Interest on Investment	-
V.	Profit before Tax (III+IV)	8.86
VI.	Taxation (As per Statement IX)	1.16
VII.	Net Profit (V−VI)	7.70
VIII.	Dividend	-
IX.	Net Profit C/F to B/S	7.70
X.	Cash Accruals (NP + Dep. + P. Exps.)	8.71
1	Debt Service /Year	4.55
2	Fund for Debt Service	10.27
3	DSCR (2/1)	2.26

IMPORTANT CONSIDERATIONS

1. Keeping in view the product to be manufactured, the assumptions for preparing profitability statement should be quite realistic.

2. Expenses should not be understated. If understated, the profitability shall be overstated resulting in unreliability of projections.

3. Following equations may be used for calculating profits:

• Operating profit = Operating Income – Operating Expenditure

• Profit before Tax = Operating profit + Non-operating Income

• Net Profit after Tax = Profit before Tax – Income Tax

4. Following equations may be used for calculating:

• Debt Service per Year: Yearly instalment of term loan + Interest on term loan; and

• Funds for Debt Service: Net Profit + Interest on term loan + Depreciation + Preliminary Expenses W/off.

5. Cash accruals are calculated by adjusting net profit in the light of non-cash items like depreciation and preliminary expenses written off.

Sl. No.	Particulars	Year
		I	II	III	IV	V
I.	Income
	Gross Sales (Rs. in lacs)	106.00	127.2	148.4	169.6	169.6
	Total Income	106.00	127.20	148.40	169.60	169.60
II.	Expenditure
	Cost of Raw Material	53.53	64.24	74.94	85.65	85.65
	Packing Material	21.41	25.69	29.98	34.26	34.26
	Salary & Wages	13.38	16.06	18.74	21.41	21.41
	Power & Fuel	2.46	2.96	3.45	3.94	3.94
	General Administration	2.00	2.1	2.21	2.32	2.43
	Interest on Term Loan	1.55	1.21	0.86	0.52	0.17
	Interest on WC Loan	1.79	2.15	2.5	2.86	2.86
	Depreciation	0.91	0.91	0.91	0.91	0.91
	Preliminary Expenses W/O	0.10	0.1	0.1	0.1	0.1
	Total Expenditure	97.14	115.42	133.69	151.97	151.73
III.	Operating Profit (I−II)	8.86	11.79	14.72	17.64	17.86
IV.	Interest on Investment	-	0	0	0	0
V.	Profit before Tax (III+IV)	8.86	11.79	14.72	17.64	17.86
VI.	Taxation (As per Statement IX)	1.16	2.24	3.24	4.18	4.38
VII.	Net Profit (V−VI)	7.70	9.55	11.47	13.45	13.48
VIII.	Dividend	-	0	0	0	0
IX.	Net Profit C/F to B/S	7.70	9.55	11.47	13.45	13.48
X.	Cash Accruals (NP + Dep. + P. Exps.)	8.71	10.56	12.48	14.46	14.49
1	Debt Service /Year	4.55	4.21	3.86	3.52	3.17
2	Fund for Debt Service	10.27	11.76	13.34	14.98	14.67
3	DSCR (2/1)	2.26	2.8	3.45	4.26	4.62

Collect the data for preparation of the statement from various departments of the organisation and it is easy to prepare the statement.  Number integrity is important for the Management Information System (MIS).