As the name suggests, the profitability forecast has the task of planning the profitability of a business start-up or any other business project that is planned as realistically as possible. The profitability forecast is the better, the closer the result is to reality.
When preparing the profitability forecast, the ultimate goal is to demonstrate the sustainability of the planned company. If the development of the profitability forecast produces results that make the business start-up or other project unprofitable, the figures, which were hopefully realistic, should not be turned around, but rather the business idea as such, the pricing, the marketing strategy, etc. be thoroughly reconsidered. A well-founded profitability forecast is a good way of starting up a business to thoroughly review and question the business idea at the same time.
What does a profitability forecast look like?
If you are looking for a clear specification or a template or sample for a profitability forecast, you will search in vain, because this does not exist, of course, because the profitability forecast is just as individual as the establishment of the company or the new project. But you should pay attention to various planning elements in the profitability forecast and these should always be included in every good profitability forecast. It refers to:
- The sales planning
- The cost planning
- The planned income statement (over the first 3 financial years)
- The minimum sales calculation
When working out the individual components of the profitability forecast, it is important and crucial that they are coherent. That means a good profitability forecast is based on the interaction or the correct interlocking of the elements.
What is the difficulty in forecasting profitability?
According to whicheverhealth, the greatest difficulty in a successful profitability forecast is to be found in the fact that the entire planning is based only on estimates, because normally there are no verifiable payments of future sales and costs. It is advantageous to work with an experienced consultant to obtain realistic figures for the profitability forecast and also to try to find comparative figures with them. Public institutes, universities and publishers offer these comparative figures for a wide variety of industries and these are useful and recognized sources for estimating your own future sales and costs.
Ultimately, what is the profitability forecast useful for?
- It helps to determine whether the project is worthwhile
- To convince the financiers (investors) of the economic viability of the project
- To set and define the goals to be achieved
- Determine any deviations from planned and target figures
In the profitability forecast, the expected costs are compared with the expected sales. The profitability forecast should always cover three years, because the third year is considered the most critical. Business start-ups who receive a low-interest promotional loan usually only have to start repaying it one year later. This then increases the financial burden by leaps and bounds and everyone should take enough time for their profitability forecast, because the more realistic it is, the safer the start phase.
For the profitability forecast the following questions should be answered:
- How much money has to be invested in the project or the start-up?
A capital requirement plan must be drawn up for this! This lists the costs for the foundation as well as for the start-up phase. This start-up phase can last a year or longer, depending on the industry. In addition, you should think about building up financial reserves in order to bridge any lean periods. In addition, orders often have to be pre-financed and, depending on the payment behavior of the customers, sometimes you have to wait for the money. In addition, payment defaults can also occur, which must be taken into account.
- What is the minimum amount of money that has to be earned for current expenses …
.. How to finance rent, food, insurance, etc. and possibly those of the family? These expenses are also recorded in the capital requirement plan under the private cost of living. It should also be entered here how much money should be earned in the short, medium and long term. (Everyone should always be realistic).
- Will the company generate enough money to cover all costs (private as well as operational)?
Sales planning can determine how much has to be sold or can be sold in a certain period of time. Every single cost item, whether service provider, employee, etc. must be calculated carefully but realistically. In addition, it must be considered how many customers can be expected in the first few months. The figures from comparable companies should be used for sales planning, as well as offer prices from future suppliers and demand prices from potential customers.
- How much must be earned in the short, medium and long term to create a financial reserve?
For this purpose, a liquidity forecast is created, which should also be updated monthly.
All these figures that have been researched flow into the profitability forecast, because they should flow into the business plan in addition to the investment or capital requirement plan and the liquidity plan.
Tip for creating the profitability forecast
If a profitability forecast is prepared by a company that is subject to VAT, this is done taking into account the statutory VAT. In addition, no contributions to health insurance or other private expenses are taken into account in the profitability forecast. One could also compare the profitability forecast with the profit calculation of a company.