Does your investment pay off in terms of results? A profitability forecast (also known as a profitability report) will answer this question. To do this, you need to compare the forecasted turnover with all expected costs and calculate the medium-term success of your company. The profitability report is part of the financial plan and is included in the business plan.
The profitability forecast in the context of business start-ups is of particular importance. With the list, founders demonstrate the viability of their business idea to third parties. Banks in particular require a corresponding calculation which shows that the expected profit both covers the living costs of the founder and is sufficient to pay interest and repayment instalments.
A detailed profitability forecast therefore helps you:
You can also use costing to identify goals and set milestones. Keep an eye on these in order to be able to take timely countermeasures in the event of deviations from the calculated target figures.
The profitability forecast is a set of figures included in a business plan. It is part of the financial plan and compares the net turnover of a company with all expenses for goods and equipment. The result of the profitability forecast is the operating income before taxes, depreciation, and interest.
Proceed with profitability planning in two steps:
To create a profitability forecast and evaluate it objectively, you need the following statements:
The core of profitability planning is the earnings forecast: the comparison of expected sales and costs. The calculation is based on previously created sales and cost plans.
A sales plan is a precise forecast of the expected sales of your company. The plan should cover a period of three years and should be based on official industry figures, especially for start-ups. If you subtract the expected costs for the use of goods and materials from the sales forecast, you get the expected gross profit for the respective planning period. While established enterprises can use the turnover and cost planning from the profit and loss accounts of previous years, new founders must provide the forecast on the basis of estimated projections.
First indications for the turnover forecast are provided by inter-company comparisons. The average turnover for a respective sector should then be adjusted to the individual circumstances with the aid of market and competition analyses. Relevant factors include the location, the competitive situation, necessary advertising efforts, and price expectations of customers and competitors. As a rule, founders resort to professional help when forecasting sales.
A financial plan is a statement of all current costs for a company – for example, expenses for personnel expenses, rent, advertising, or travel expenses. The difference between gross profit and operating costs is the operating income before taxes and interest. If these expenses are subtracted, the net income for the year is obtained. A negative result is called a net loss for the year.
Once you have the required plans and statements, compile the figures according to the below profitability report template.
Basic outline of the profitability report
The following must be done when drawing up the profitability forecast:
While interest is to be shown as a cost in the profitability forecast, redemption instalments are not taken into account. The latter are to be paid from the net income for the year.
The profitability forecast refers exclusively to the business enterprise; private payments and receipts are not included in the list.
In order to objectively estimate a company’s annual surplus, you should determine how much profit you need to make to cover your own living expenses. To do this, create a separate capital requirement plan for private expenses.
The calculated net income for the year should cover you, and, if applicable, your family’s living expenses and should also be sufficient to pay the payment instalments of any loans or lines of credit.
Business start-ups are generally dependent on borrowed capital. The figures in the business plan therefore play a central role. When it comes to convincing investors of the planned business’s profitability, you must not make any mistakes in the profitability calculation. We advise you to:
Click here for important legal disclaimers.
As April 15 approaches, businesses are faced with a major challenge: They not only need to communicate their tax returns to the IRS, but also their previous year’s profits. Small businesses, self-employed individuals, and freelancers need to take the cash inflow and outflow principle into account when calculating their profit. But what exactly does this mean? This guide will help you through this...
In order to properly finalize an annual financial statement, most corporations must include a profit and loss (P&L) account, which, as its name already suggests, breaks down their profits and losses for a given financial year. However, we must ask what a P&L statement should really look like. We explain the procedure surrounding P&L statements so that you stay on top of all laws, methods, and...
Provide powerful and reliable service to your clients with a web hosting package from IONOS.
