How to Setup a Profit Loss Projection for a Commercial Property

A commercial property's future value is predicted by calculating a profit loss projection.

To appreciate the true value of commercial property, you need to know not only the value of the real estate, but also the earning potential of the property. To calculate how much the property could bring in, you need to calculate a profit loss projection. This calculation will give you an idea of investment value of the property as well as helping guide you in preparing a property budget and in predicting future trends with the property.

Things You'll Need

• Business records showing expenses
• Business records of income
• Market trends for similar businesses

Instructions

1. Create a spreadsheet. A web search for "profit loss projection" will locate several free, easy-to-use profit loss projection spreadsheets. In the top rows list all sources of income for the business. Most of the spreadsheet will reflect money going out of your business. List each category of expense on the left-hand side of the sheet. Expenses include cost of inventory, rental expenses, utilities, payroll and insurance. The columns at the top should be labeled by month.

2. Fill out the spreadsheet. Going back over your books, fill in all the boxes on the spreadsheet for which you have data. The more information you can fill in, the more accurate you can make your projections. Once you have all amounts filled in, subtract expenses from income for each month. This number will tell you the profit or loss for that month.

3. Compare categories. Most businesses have good times of year and slower times of year. Retail is strongest in the fourth quarter; construction usually does better during the summer months. To find the cycle of the commercial property you are looking at, compare the monthly totals. Once you have an idea of which months did better in the most current year, compare spreadsheets from prior years. This will tell you if, year to year, the property has done better or worse.

4. Make your initial projection. As with any prediction, you will not have any guarantees. But using the spreadsheets allows you to make an educated guess as to future performance. If the property has shown a steady increase in month-to-month income when compared over several years, you have an indication not only that growth exists, but also about how much growth exists. Likewise, if month-to-month earnings fall from year to year, that does not look as good for the property.

5. Figure in external information. To make the most knowledgeable projection about profit or loss, you must also take into consideration external economic factors. For example, in real estate the market value crashed in many places in 2007, 2008 and 2009. If you were calculating profit and loss, you would have to adjust your prediction based on that loss of real estate value. On the other hand, if a property sits in an area of town that has suddenly seen an influx of new business, values will likely increase along with the new vitality. You might then feel justified in projecting stronger profit than you otherwise would have thought.

Tips & Warnings

• Projections have more basis in fact than fortunetelling, but the future is still uncertain. Use the information from projections, but do not count on their being entirely accurate in planning your financial decisions.

References

• Profit Loss Projection
• INC.: Profit-and-Loss Projection
• Accounting for Management: Financial Statement Analysis