Factoring in For Profits
A P&L (Profit and loss forecast) is what it sounds like, a forecast of what your sales are and what you’re putting into your pocket. How could something that explains how much money you are going to make sound so lame. Let’s break it down into smaller chunks.
(Warning! Basic math skills needed, so break out your calculator and get ready.)
1. Future sales
Grab your crystal ball and investigate the future once again to see how much sales your business has made. No, we don’t have that ability, but it sometimes can seem like that would be the only way to find this elusive number, but it’s not.
You need to look at that growth chart you made earlier and try to determine what this number will look like. Your sales projections aren’t perfect so you’re going to want to lower your initial guess by 10%.
This allows you that cushion, you still want to keep an eye on exactly how well these predictions are turning out to be.
2. Cost of Doing Business
Determine what you are going to spend on supplies and services for the next year. These are not fixed costs, they are variable costs, because they can fluctuate over time. This could be anything from supplier costs, to different software programs your company uses. One example of this is running an email campaign. The fixed cost would be the amount of money you spent on hiring a writer to create the emails.
Most of the services out there for delivering your emails cost something to start using their service. This number is usually pretty cheap from 15 to 30 dollars, but once you hit a certain number of clients in your email list, the price can go up to 1,000’s of dollars.
This is a gradual climb, but you wouldn’t want to have this set in the budget as a fixed cost at $20 a month while you’re paying over $1,000 a month. That adds up to $12,000 a year, and if you make this mistake in more than one area this could end up being a difference of tens of thousands of a difference in money.
There are many programs out there that allow you to input all your costs as either fixed or variable, and this will help you keep track of the cost.
Always know how much money you’re spending, or you’re never going to know how much you’re making.
3. Show Me The Money
Now here comes the fun part. Time to see how much your making, well this could also be devastating so sit down and crunch the numbers. If you’ve been planning and keeping track of data, this shouldn’t be too much of a shock to your system. You probably have a good idea of what this number is going to be, but any big differences could be areas you can improve in. Take the money you spent over that quarter and subtract that from your overall sales and that gives you the number you’ve been waiting for. The magical number that will make this feel all warm and fuzzy inside. This is your net profit. Yep bask in that number for a minute and then continue, we’re not done yet.
4. Profit Margin
This is the number you really need to know, and it fluctuates. Just because you made a tidy profit one quarter doesn’t mean the next one will be as profitable. You could make the exact same amount of sales in July that you did in June and still end up having a huge dip in profits.
This takes us back to our discussion on variable costs. You already have all the numbers you need up above. As your costs fluctuate so does your profit margin.
Simply divide your estimated profit by your estimated sales. Yep more math! If you made $100,000 in January, but you spent $70,000 you’re making a profit of 30%. That literally means you made $30,000. Now let’s say that you made $70,000 the next month, but you only spent $35,000 now you made a profit of 50%, which means you brought in $35,000
The takeaway from this is that the amount of money you make in sales is only 1/3 of the equation. Knowing your costs and net profit are crucial into seeing what your profit margin is. You want to generally shoot for a profit margin of at least 10%, but if you have one of 20% you’re doing great.
Just don’t let it drop below 5%, you might think that if you can bring in over a million dollars then your 5% is fine because you’re bringing in so much money. The problem is that number could drop quickly and any drastic drop could bankrupt you very quickly.