How to Forecast Profit & Loss For Business OwnersSeptember 22, 2017
Creating a profit and loss forecast is an important part of financial planning but can seem like a daunting prospect, especially for start-ups. Working out estimates for revenues and costs will ensure that your business plan is feasible and will allow you to make adjustments to allow profitability, or breaking even, in the face of challenges. What’s more, without realistic, well thought out financial plans it is highly unlikely you will be able to attract any all-important investment in your business.
To help you make useful projections, we’ve put together a basic guide for creating a profit and loss forecast for your business.
The first step you should take is to work out an estimate of how much money you’ll make a month for the next 12 months. This will be the amount of money you make from sales of your products or services.
Try to make this figure as accurate as possible as wildly optimistic figures will be of no help; conservative guesstimates are the preferable option. If your business is already up and running, you can use past sales figures to inform your estimates. Also, if you know of competition or seasonal fluctuations which will likely affect your business, make sure you account for these in your revenue predictions.
Next, you should work out estimates of the costs your business will incur. Costs are generally split into two categories: fixed costs (also known as overhead) and variable costs. Fixed costs are ones that will stay the same over a long period of time; these are generally easier to estimate. Variable costs are ones that are changeable and linked to your business’ output. Examples of expenses include:
- Accounting/legal fees
- Cost of goods
- Supplies and materials
- Labor costs
- Direct sales and marketing
Calculate Gross Profit
From your estimates of costs and revenue, you can now work out an estimated gross profit.
Gross profit is calculated by subtracting your total monthly variable costs from your total monthly sales revenue. Your gross profit figure represents the amount of profit you make from your goods or services after deducting the costs associated with making or providing them.
Calculate Net Profit/Loss
With your costs and revenue estimates, you can also calculate your business’ projected net profit or loss. Net profit, or your bottom line, is the actual amount of profit – if any – that your business makes. Net profit is calculated by subtracting both your monthly fixed costs and variable costs from your monthly sales revenue. When dealing with annual fixed costs – such as insurance – simply divide the figure by 12 to get a monthly amount for your forecasting.
Your forecasts of net profit/loss let you make a judgement on the feasibility of business plans and your company’s long-term financial health. If you end up with little profit or even a loss, this can be a signal that you need to cut back on costs.
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If you need help with financial planning, including forecasting profit and loss, Murray & Lamb are on hand to help those across the North East. Our experienced chartered accountants and business advisors provide a wide range of financial and accounting services for businesses and entrepreneurs, helping you stay financially stable and well-informed. From well-established companies looking to streamline their existing systems to business startups looking for financial guidance, our professionals are well suited to help you achieve your goals. For further information, don’t hesitate to contact our friendly team today.This entry was posted in Business Advice, Finance, Start Ups and tagged Forecast, Loss, Predictions, Profit. Bookmark the permalink. ← 5 Things That Make A Long-Term Business Plan Reliable 5 Characteristics of Successful Entrepreneurs →