Your next job is to forecast how much money you’ll need. You can’t make realistic financial projections in a vacuum; they must be integrated into a thought-through plan. As a result, you’ll need to make a number of decisions about how your business will operate and forecasts of financial results. But don’t let this intimidate you. You’ve probably been thinking about the financial side of your business for some time. You will inevitably need to make some assumptions and even a guess or two. Of course, you should make your projections as accurate as possible; shoot for an accuracy rate of plus or minus 10%.
What Is a Profit and Loss Forecast?
A profit and loss forecast is a projection of how much you will sell and how much profit you will make. This is the foundation of your business plan. It gives you and your potential backers the basic information necessary to decide whether your business will succeed. Basically, a profit and loss forecast forces you to estimate how many dollars you will take in and how many dollars you will spend for some future period. While other extremely important factors affect your business, such as your cash flow (Chapter 7), you’ll be in good shape if you can confidently predict that the money coming in will exceed the money going out by a healthy margin.
Determine Your Average Cost of Sales
Your first step in your profit and loss projection is to determine your average cost of sales—that is, your direct cost of the products or services you sell. You’ll use the Sales Revenue Forecast you completed in Chapter 3 to make this estimate. One way to derive your average cost of sales is to estimate your annual sales revenue for each product or service. Then calculate each product’s annual cost of sales. Finally, add up the numbers to get an annual average.
Review Your Profit and Loss Forecast
You’ve now completed your first run through a Profit and Loss Forecast. Date it so you won’t get confused if you do another draft. I hope it looks positive. However, if like many people you find you need to increase profitability to make the business a good economic idea, go back through all your assumptions.
Your Profit and Loss Forecast and Income Tax Return
Figuring out your business’s income tax return involves more calculations than we have shown so far. One major difference involves the cost of sales, which we have viewed as a simple percentage of sales for forecasting purposes. You’ll need to follow more complicated rules when computing your business income tax return. Read below to learn how to spot employee theft. You can skip this discussion if your business has no inventory