Both start-up and existing businesses must predict future operating results, for instance to schedule sufficient staff or purchase enough supplies. Profit and loss projections require businesses to analyze sales revenues (income) and expenses. Profits rise when revenues are greater than expenses, while losses occur if expenses are greater than revenues. Although you can create a profit and loss projection by hand, it is easier to use a spreadsheet on a computer.
All businesses (fast food, bookstore, physician’s office) should create a custom profit and loss analysis. For example, a dental practice should have different expenses than an advertising firm. You should project business profit and loss on an annual and monthly basis. If available, use past sales revenues and expenses (e.g., past three and five years) to create your prediction.
Remember that your forecast is not going to be exact but should be as accurate as possible. Update the analysis as needed and consider outside factors. For instance, if your business uses a free-standing retail space, then projections should be adjusted when there will be construction on nearby roads that might affect consumer traffic.
Businesses calculate gross profit by subtracting total COGS from total sales. The cost of goods sold (COGS) is an important factor. The COGS calculates the total expenses related to creating your business product or service. Examples include the cost of raw materials, packaging your products and labor. If employee sales commissions are applicable, then they should be included within the COGS. If a business does not control its COGS and adequately price its products or services, then it likely will face significant losses.
Operating expenses, or overhead, also must be considered. Unlike COGS, overhead is not directly related to a business' products or services. Instead, it consists of business essentials such as office supplies, rent, telephone, utilities, insurance, taxes, depreciation, advertising and staff salaries.
To calculate net profit, you must subtract total overhead expenses from gross profit. Be aware that operating expenses are not fixed. For example, your utilities might be higher during May and December than during March and September. If your net profit is below expectations, reassess your business expenses. Negotiate better terms on essential expenses, such as rent, or consider increasing your insurance deductible for a lower annual premium.