A Profit and Loss Forecast is a vital part of business planning. They help you develop long-term strategic plans for your business; where you are now, where you want to be, and how you are going to get there. Also, a Profit and Loss Forecast is essential to attract potential investors.
Even though the future is always uncertain and unpredictable, it is still possible to use forecasts to guide your decision making, exploit trends, and give your business a competitive edge. Unless these forecasts are accurate, they aren’t helpful at all. It is best to start with existing financials as a guide and create a 12-Month Rolling Profit and Loss Forecast.
If you are a new business or potential start-up, we can help you develop sound, realistic forecasts. Just give us a call at (480) 641-4556 or send us an email for a free consultation.
It is difficult for business owners to forecast how well their business will do in the next 12 months. This is because business owners have a strong temptation to be audaciously optimistic when forecasting the growth of their business. And when they are asked to be write those forecasts down, they end up using extremely conservative estimates to in order to counter their audacious optimism. You do not want your 12-Month Rolling Profit and Loss Forecast to be either too optimistic, or too conservative. This is why we suggest creating 2 different 12-Month Rolling Profit and Loss Forecasts; an optimistic forecast, and a more realistic forecast.
- The Optimistic 12-Month Profit and Loss Forecast
Start by creating your optimistic 12-Month Rolling Profit and Loss Forecast. Embrace your dreams! Think big! If everything were to work out perfectly for your business, how would that business look on paper? This will get the creative juices and excitement flowing so that you can start strategizing on how to get your business to where you want it to be. Just by creating an ambitious forecast, you are more likely to create the breakthrough ideas that will launch your business to the next level.
- The Conservative 12-Month Rolling Profit and Loss Forecast
Once you have created your optimistic 12-Month Rolling Profit and Loss Forecast, you can move on to create your conservative 12-Month Rolling Profit and Loss Forecast. Start with your optimistic forecast and reevaluate your assumptions. Will you really be able to roll out 5 new products next year? Or are 1 or 2 new products next year more realistic? It is time to reign in that optimism to set realistic and achievable goals for this forecast.
Using Forecasts to Run Your Business
Now that you have created both an optimistic and a conservative 12-Month Rolling Profit and Loss Forecast, you can use these as tools to run your business.
Let’s say that your conservative forecasts sales to increase by 4%, which would put Gross Revenues at $2 million. You know that your current staff is at or near maximum capacity and this much growth will be hard for your current staff to handle. You have been meaning to hire a new person for some time, but you have been holding off on hiring because you were uncertain of future growth. Now you know that you can hire that new person, because even in the most conservative outcome you need to hire a new person.
Let’s say that you forecast a new product line. In the months following the new product line, you notice that your Gross Margin falls to 63%. In your industry, normal Gross Margins are around 70%. These new numbers tell you 2 things: either you are not charging enough for your new product, or the cost of your new product is too high. If the market will allow it, you can raise the price of your new product. Otherwise, you need to reevaluate the cost of your new product.
We could keep going with great examples of how to use a 12-Month Rolling Profit and Loss Forecast, because there are so many uses for this forecast. The bottom line on this forecast is it is another tool for the business owner to make sound business decisions so that they can sleep easy at night knowing they made the best decision possible for their business.
Utilizing a 12-Month Rolling Profit and Loss Forecast is very attractive to current and potential investors. It shows them that you understand the importance of the numbers and are more focused on running your business, rather than being run by your business. It shows you are in control. The data from the 12-Month Rolling Profit and Loss Forecasts gives these investors the information they need when choosing whether or not to fund your venture. Creditors can also use the 12-Month Rolling Profit and Loss Forecast to determine a borrower’s credit worthiness, loan amounts, and repayment terms.
Give us a call at (480) 641-4556 or send us an email and let us help you create a 12-Month Rolling Profit and Loss Forecast, so you can sleep easier knowing the business decisions you made are sound.