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.

Purpose of the prof­itabil­i­ty forecast

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:

  • Estimate the success of your in­vest­ment
  • Convince investors of your company’s economic viability
  • Demon­strate the viability of your business

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.

De­f­i­n­i­tion

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.

Prof­itabil­i­ty planning

Proceed with prof­itabil­i­ty planning in two steps:

  1. Prepare a prof­itabil­i­ty report: Determine the expected operating profit on the basis of sales planning and a cost forecast for the next three fiscal years.
  2. Evaluate prof­itabil­i­ty report: Check whether the cal­cu­lat­ed operating profit covers interest and taxes.

To create a prof­itabil­i­ty forecast and evaluate it ob­jec­tive­ly, you need the following state­ments:

  • Sales and cost plan
  • Resource plan
  • Capital re­quire­ment plan for private living costs

Creating a prof­itabil­i­ty report

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.

Tip

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:

  • List net sales, revenues and expenses, excluding sales tax
  • Display the sales of different lines of business sep­a­rate­ly
  • Specify personnel costs, including all non-wage labor costs.

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.

Note

The prof­itabil­i­ty forecast refers ex­clu­sive­ly to the business en­ter­prise; private payments and receipts are not included in the list.

Evaluate the prof­itabil­i­ty forecast

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.

Tips for a suc­cess­ful start-up

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:

  • Create a prof­itabil­i­ty forecast based on a sound sales and cost plan
  • Use the principle of prudence as a basis for your costing: If you have room for maneuver in your as­sess­ment, you should tend to set costs higher and sales lower

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