How to Project Profit and Loss

How to Project Profit and Loss. One important aspect of business management is understanding profit and loss. It is better for a business to be proactive rather than retroactive in calculating these figures. The only way to be proactive is to project your profit and loss. While you can hire an accountant to do this, you can also do it yourself if you are willing to invest some time.

Determine your profit. You need to know how much money you should bring in on a monthly basis. This figure is generally the amount of sales. New businesses may be able to obtain industry standards, where an established business should be able to consult their previous year's records.

Know your variable expenses. Your expenses are what is consider loss. A variable expense is any expense that does not have an established rate per month. If possible average your variable expenses from the last year. For a new business, estimate what these expenses will be.

Figure out your fixed expenses. Any payment that you make on a monthly basis that is the same each month is a fixed expense. Your fixed expenses may include things like rent, loan payments or salary. These expenses get added to your variable expenses to determine your total loss.

Prepare for trends. Your business will have set spending trends based on the industry. Plan for these trends to occur and reflect the expected outcome in your profit and loss. For example, if you are in a retail business you may calculate November and December sales to be higher due to the holiday season than the sales for February.

Maintain profit and loss records. Keep accurate records of your full profit and loss statements. You can project on a month to month basis; however, it is easier to project January's profit and loss based on the previous January's profit and loss. This allows you to see the sales cycle for your business more clearly than projecting January's profit and loss based on December's profit and loss.

Factor in extenuating circumstances. At any given time your business can have something major that will change. This could be a location change, extra expenses based on weather or the need to repair or replace equipment necessary for running your business. You can forecast this possibility by adding a miscellaneous expense to your variable expenses.

Revisit the projected profit and loss. Set up times to go over your actual profit and loss compared to your projected profit and loss. Make adjustments as needed. The overall goal of your projected profit and loss is to know what your business must do in order to be profitable.

Tips

  • You should have basic understanding of financial statements in order to prepare your own profit and loss projections.

Warnings

  • A projected profit and loss statement should not replace detailed statements.

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