Does your in­vest­ment pay off in terms of results? A profit forecast (also known as a profit 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 profit report is part of the financial plan and is included in the business plan.

Purpose of the profit forecast

The profit 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 profit 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 profit 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 profit forecast is the operating income before taxes, de­pre­ci­ation, and interest.

Profit planning

Proceed with profit planning in two steps:

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

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

  • Sales and cost plan
  • Resource plan

Creating a profit report

The core of profit 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 profit report template.

Basic outline of the profit report

The following must be done when drawing up the profit forecast:

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

While interest is to be shown as a cost in the profit forecast, re­demp­tion in­stall­ments are not taken into account. The latter are to be paid from the net income for the year.

Note

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

Evaluate the profit 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 profit, you must not make any mistakes in the profit cal­cu­la­tion. We advise you to:

  • Create a profit 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 manoeuvre in your as­sess­ment, you should tend to set costs higher and sales lower

Please note the legal dis­claim­er relating to this article.

Reviewer

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