If your business is registered at Companies House, you have to prepare an annual profit and loss statement by law. If you’re not registered, you have a choice. But choosing to prepare a profit and loss forecast could have valuable benefits for your business.
A profit and loss forecast is a picture of the health of your business at a particular moment in time. In its simplest form, it is a forecast of income from sales minus all expenditure. If sales are greater than expenditure, your business is making a profit for the period, and vice versa. Here’s a simplified example. Scroll down for a more in depth Excel spreadsheet profit and loss template.
You can prepare forecasts to cover different periods - at the end of the current month, for example, or the potential profit or loss in six month’s time based on your actual or estimated sales and costs.Learn more: What are statutory accounts?
The information can help you understand the health of your finances. Are slow payments likely to cause cash flow problems? Should you arrange better terms with your creditors to spread payments on outgoings? Are you likely to hit problems in any particular period, perhaps because of seasonal sales patterns?
Using that understanding, you can make plans based on accurate information, rather than guesswork. You may decide to apply for funding to cover potential shortfalls. You could plan new products or services to increase revenue if expenditure regularly exceeds income.
Late payments by customers can damage cash flow and make it difficult to forecast accurately when you will receive income. By identifying late payers and taking proactive measures, such as offering discounts for early payment or factoring your invoices, you can improve cash flow and make more accurate financial forecasts.
When you’re in control of your finances and you can plan to put measures in place to respond to any potential problems, you reduce the risk of running out of cash and having to take drastic short-term measures that may not be in your best long-term interests.
If you are applying for loans or credit, or looking for investors to take a stake in your business, your chances of success are greater when you can demonstrate that your business is healthy and you are in control of your finances.
Learn More: EIS: Enterprise Investment Scheme
When you have an understanding of the short and medium-term health of your business, you can plan for growth with greater confidence. You can identify a point in time when profits are sufficient to allow new recruitment or investment in new facilities, products or services.
Financial information is an essential element in your business plan. Including accurate information and updating it regularly will ensure that your plan aligns with your current situation.
Having an accurate forecast of your financial position ensures that you have sufficient funds in place to meet tax deadlines and other payment obligations on time.
It’s important to include all income and expenditure that contributes to profit and loss. To forecast gross profit, calculate total sales income and total cost of sales. You also need to include information on when payment will be received and when sales costs fall.
The primary source of income is sales of products or fees for services such as consultancy, maintenance and repair. You may also have income from sales of licences to other companies.
If you manufacture products, include the costs of raw materials and operational costs for the volume you plan to produce. If you buy products for resale, include the cost of buying in products to meet your monthly or quarterly sales forecasts. Include any discounts for bulk purchase.
Include the cost of product distribution and delivery plus any marketing or promotional campaigns you plan. Factor in any discounts you offer to distributors or retailers.
Subtracting the cost of sales from sales income provides you with a figure for gross profit. To calculate net profit, include all the overheads or indirect costs of running your business.
These items vary by type of business, but could include any of the following:
Wages and salaries to employees, plus any benefits, such as pension contributions or bonuses.
Payments to consultants, contract workers or freelance suppliers.
Communication costs, including telephone bills and broadband charges.
Rent and rates for your premises, plus any maintenance or cleaning costs.
Energy and utility charges.
Bank charges, interest and loan repayments.
Office costs, such as stationery and office supplies and equipment hire.
Depreciation for any fixed assets.
Travel costs, including train fares, fuel and car repayments and maintenance.
Subtracting the cost of all overheads from gross profit provides you with a net profit forecast for any period.
When you have all the figures together, including accurate or estimated figures for future income and costs, you can prepare the forecast, using a spreadsheet or one of the handy templates available from various suppliers. Here’s a few great but simple profit and loss template via Small Business.co.uk.
When you’re adding figures to the profit and loss forecast template, it’s useful to include best and worst case scenarios. That highlights the potential risk of cancelled orders, late payments or price increases on the forecast.
You should also update the profit and loss forecast template regularly so that it reflects the latest situation – new orders, payment delays, unexpected bills or changes in business conditions.
And, it’s important to analyse the forecast to measure the effect of any changes you have made, such as tightening credit control, launching new products or appointing new retailers or sales representatives.
Accurate forecasting is the key to financial peace of mind and our team of small business accountants are very good at it. We can help in setting up the right reports for your business, using the latest software for efficiency and cost savings. We have teams of London accountants, Manchester accountants, Brighton accountants, online accountants and Xero accountants.
We also provide tailored yet affordable services to assist clients in understanding, forecasting and interpreting financial data whether from management accounts, cash flow or otherwise.
In many cases, we have provided clients with insights that help to minimise hidden risks, save costs or plan ahead to outperform expectations and competitors. For more information, please contact us on 0207 043 4000 or firstname.lastname@example.org, or get an instant accounting quote. Our solicitors can also help with a range of business-related legal services, get in touch to find out more.
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