Your tuckshop, book shop and uniform shop are all examples of trading activities (see Tuckshops and other businesses). Trading statements, showing the profits made for the year to date (YTD), are required for each trading activity of the P&C. The profit is calculated by comparing receipts from YTD sales with payments for the same period to get a net result.
Trading statements must be produced at least every quarter and for the financial year that forms part of the annual financial statements.
Ideally, trading statements should be generated monthly so that you can quickly identify and address any unusual trends. Trends towards a loss should be identified before the financial position becomes difficult.
A sample of a trading statement new window 75K is shown in Example 5.
Gross profit is the difference between the total amount of money received — sales income — less the amount that was paid out to purchase those goods — cost of goods sold.
Gross profit objectives and mark-ups should be decided by the P&C. Base your decision on whether you want high profits or whether you want to provide an inexpensive service to students for items such as lunches and uniforms.
A low gross profit percentage indicates one or more of the following:
A key concept to understand is that gross profit (%) and the mark-up (%) on an item are different.
Gross profit is calculated from the sale price whereas the mark-up is calculated from the cost price.
If an item is marked up by 33 1/3 per cent, the gross profit is 25 per cent. This is demonstrated in the following example. Look at the worked example for details of this calculation.
Look at the value of the gross profit for a period of sales.
This trading activity has generated a gross profit of 25 per cent. The calculated profit being:
($4 452.00 / $17 809.13) x 100 = 25 per cent
The cost of goods sold needs to be calculated so that your gross profit can be determined. The cost of goods sold is calculated as follows:
Opening stock (saleable items on hand at start of period valued at cost)
plus Purchases (the total value of items purchased for resale during the period)
less Closing stock (saleable items on hand at end of period valued at cost)
The answer to this calculation equals cost of goods sold (the cost of saleable items sold during the period).
Your P&C will need to be aware of the net profit generated by a trading activity because this is the best indicator of whether an activity is worth continuing. If the net profit is small then your efforts may be better directed toward other activities. A small net profit can also highlight the need to increase profit margins or confirm that the service is very close to cost neutral.
You calculate net profit by deducting from gross profit the operating expenses such as cleaning, wages, paper bags and other items that do not affect the cost of goods sold. Look at the worked example to see the calculation.
The net profit generated by this trading activity is $1 597.86. This trading statement forms part of the annual financial statements.