How to Estimate Expected Profit
When you're rolling out a new product or trying to set your budget for the next year, the expected profit is an important number to estimate. It's impossible to predict this figure with extreme accuracy because your sales or number of clients vary with changes in the economy and the needs of the clients. However, you can use previous figures and projections as well as the hard costs of running your business to determine an estimated profit expectation.
Calculate the cost of producing the product. Add in all expenses incurred during production, such as design, manufacturing, packaging and distribution. This is considered your cost of goods sold.
Add in a percentage of your company's overhead expenses. Find your totals for the time period you are estimating, such as one month, from expenses such as rent, utilities and insurance costs. Determine what percent of sales the new product will be. For example, if you currently offer three products and are calculating the profit of the new fourth product, you probably want your product to constitute 1/4 of your sales. Take your total overhead expense number and divide it by 1/4, or 0.25.
Add the amount of overhead expenses applied to your new product to your cost of goods sold for that product. This gives you a total cost number for your new product.
Take the sales price of the product and multiply it by the number of products you plan to sell in the given time period. For example, if you're selling the product for $10 each and you have 100 to sell in a month, that's $1,000 in gross income. Base the estimated amount of sales on the success of previous product releases or on marketing research and focus groups.
Subtract the total cost from the gross income to determine the expected profit. If your cost of goods sold is $200 for 100 pieces and your total expenses applied to that product are $400 for the month, then the overall cost of your item to you is $600. Subtract that from the expected sales, $1,000, for an expected profit of $400.
Determine your company's overhead expenses, including labor, utilities, mortgage and inventory, if applicable. Use the expenses from a previous time period, such as the most recent month or the past year, to estimate your expenses for the upcoming time period, such as the next month or year.
Estimate how many clients will use your service over the next month or year, based on the number that you served in the past month or year. If the number grows or shrinks consistently each month, add or subtract clients as necessary from the upcoming period.
Calculate the average amount of income from each client. For example, add up all the service income from the previous month. Divide that number by the number of clients. If you're an accountant who brought in $10,000 in revenue last month and served 50 clients, your clients pay an average of $200 each.
Take the number of clients you plan to serve during the next period and multiply that number by the average income per client. For example, if you typically add five clients per month and served 50 last month, multiply 55 clients by the $200 average expenditure. This gives you an estimated gross income of $11,000 for the next month.
Subtract your total expenses from the gross income. If your total expenses are $7,500 per month and you expect to bring in $11,000, your estimated expected profit for that month is $3,500.
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If your business follows a cycle, such as an accountant who is busier during tax time, use the same month from the previous year to help you estimate profit rather than the most recent month. For example, use February of last year to help you estimate profit for February of this year, rather than using numbers from January of this year.