Determining whether your business will be profitable – and how long it will take to turn a profit – is a must to ensure your venture has the potential to be a financial success.
Let’s take a look at the series of steps involved in a profit and loss forecast.
First, you need to determine ‘gross’ profit. To do this, estimate likely revenue from sales or services. Remember to allow for seasonal variations.
If the business involves the sale of a product, you will need to determine the ‘cost of goods sold’ (COGS). This is worked out by totalling your opening stock value plus likely stock purchases over the period, less the estimated value of your closing stock.
Now subtract COGS from your revenue. The figure that remains is your gross profit.
To determine your net profit – or ‘bottom line’ - you will need to total all the other operating expenses (sometimes referred to as ‘overheads’) that you believe the venture will incur over the period. These operating expenses will typically include:
- Rent
- Insurance
- Stationery and supplies
- Accounting and bookkeeping fees
- Utilities
- Wages (if you intend to employ staff).
There may also be ‘non-cash’ expenses like depreciation on your office equipment. The Tax Office sets out a range of depreciation rates for a wide variety of business-related equipment.
Now, total both your cash and non-cash expenses.
The difference between gross profit and operating expenses is called ‘net profit’. This is untaxed profit, so be sure to make a provision for tax, which will vary depending on the structure of your business (sole trader, partnership or company). Note too, if you charge GST (goods and services tax – currently set at 10%) on your sales or services, you will need to make an allowance for both the GST you have collected and the GST input credit you are entitled to claim on business expenses that include GST.
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