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Profit and loss - general question please help you experts

 
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nicegirl



Joined: 04 Sep 2010
Posts: 16

PostPosted: Tue Dec 07, 2010 7:05 pm    Post subject: Profit and loss - general question please help you experts Reply with quote

I work for a consulting company, whereby we invoice our clients based on programs we run. We are now doing a Profit and loss statement, and my manager has said that I need to include fixed expenses in the revenue figure.

Can someone please explain why we are doing this - he has just said "please just do it". I have to do a profit and loss analysis based on this.

Thanks
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marc



Joined: 19 Nov 2005
Posts: 175
Location: Whyalla SA

PostPosted: Wed Dec 08, 2010 10:10 pm    Post subject: Reply with quote

Short Answer:
Fixed Costs are the overheads of the business. Stuff that you have to have just to be in business even if you didnt make $1 of sales. Variable costs are those costs that change with the level of business. Revenue less variable costs is gross profit. Gross profit less overhead is net profit.

Longer Answer (cause as an accountant I cant help myself)
Fixed costs are not necessarily fixed and variable costs are not necessarily variable. The rent is usually classed as a fixed cost. No building = no business even if there is no sales. But if business took off you might need a bigger building therefore rent is not necessarily fixed but is still generally an overhead ( unless you are renting on to a subtenant in which case its a cost of goods sold).

As an example, think of the telephone bill. There is line rental, which is a fixed cost, and call costs which vary with the number of calls and depending what you're calling about it could be a cost of goods sold (cold calling a customer) an overhead (getting a water leak in the office fixed) or a personal expense (picking up the kids). So pick a column!

You serve software i think. The electricity for the office is an overhead but the electricity to power the servers is a cost of goods sold.

Realistically, and the more you get into it, you realise that financial reports are at best an approximation because you cant get totally hung up on this stuff or you would be there for ever. The old joke, Qu. what was the profit this month? Ans. what would you like it to be?

Why do it? Cause the overheads go out even if nothing comes in. Better to think of them as committed costs. You have pay them regardless.

hth

Marc
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