Report name: Sample Forecast
How the Profit and Loss Forecast is Calculated
This working example shows how an operating, pre-tax and net profit forecast is calculated and displayed by Figurewizard.
How the Profit and Loss Forecast is Calculated
This working example shows how an operating, pre-tax and net profit forecast is calculated and displayed by Figurewizard.
| forecast for year beginning the 1st. | May 2017 | May 2018 | May 2019 |
| Sales | 1,500,000 | 1,650,000 | 2,200,000 |
| add: Delivery / Service Charges | 37,500 | 41,250 | 55,000 |
| Total Sales | 1,537,500 | 1,691,250 | 2,255,000 |
| less: Cost of Goods Sold | 885,000 | 973,500 | 1,298,000 |
| Gross Profit Cfwd | 652,500 | 717,750 | 957,000 |
| Wages NI and Pensions | 300,000 | 310,000 | 330,000 |
| Administrative Overheads | 105,800 | 127,200 | 145,500 |
| Selling Overheads | 136,381 | 156,500 | 203,567 |
| Depreciation | 10,876 | 17,543 | 20,290 |
| Operating Overheads and Expenses | 553,057 | 611,243 | 699,357 |
| Operating Profit | 99,443 | 106,507 | 257,643 |
| less: Interest Charges | 5,062 | 7,469 | 5,394 |
| add: Exceptional Item (Profit on Asset Sales) | 0 | 0 | 0 |
| Pre-Tax Profit for the Year | 94,381 | 99,038 | 252,249 |
| less: Corporation Tax | 13,613 | 18,495 | 46,671 |
| Net Profit Cfwd | 80,768 | 80,543 | 205,578 |
| Corporation Tax % of Pre Tax Profit | 14.4% | 18.7% | 18.5% |
Gross profit, operating profit, pre-tax profit and net profit (also known as net income) describe the four steps towards reporting the profit performance of a business.
All four are important but the one that matters the most is the operating profit forecast, describing as it does profits that are expected to arise from core trading activity (operations) and nothing else.
As income from investments or from the sale of fixed assets are not connected to operations theese are not added to the profit and loss forecast until after the operating profit forecast has been calculated.
Everything about profits displayed in your business plan will depend on an uninterrupted supply of goods and services as and when they are needed.
Nothing is more likely to create such interruptions than cash flow deficits. Even a single month's shortage of cash can result in interruptions to supply, a loss of confidence among suppliers and serious negative consequences for your profit forecast.
Eliminating forecast cash flow deficits usually starts with reducing oveheads. In this sample forecast fixed overheads (rent, advertising etc.) are 130,000 and forecast wages 300,000, a total of 430,000.
Using our What-If calculator to reduce fixed overheads and wages each by stages of 5% and 10% respectively, pre-tax profit, liquidity, cash flow and the bank will improve as follows.
| Year 1 less: | Fixed OH + Wages | Pre - Tax Profits | Working Capital (Liquidity) | Operating Cash Flow | Bank: Year End |
| 0% | 430,000 | 94,381 | 63,022 | 12,208 | -35,439 |
| 5% | 408,500 | 116,779 | 81,165 | 33,488 | -13,261 |
| 10% | 387,000 | 138,712 | 98,931 | 54,768 | 8,452 |
For most businesses the two most important variable overheads are the costs of shipping orders (carriage out) and bad debts.
These are set in this forecast as 4% and 3% of sales. Again reducing each of these two in stages of 0.25% as fixed overheads and wages reduce by 5%, means forecast profit, liquidity and cash now look like this.
| Shipping and Bad Debts | Fixed OH + Wages | Pre - Tax Profits | Working Capital (Liquidity) | Operating Cash Flow | Bank: Year-End |
| 7.0% | 430,000 | 94,381 | 63,022 | 12,208 | -35,439 |
| 6.5% | 408,500 | 124,514 | 87,430 | 40,896 | -5,698 |
| 6.0% | 387,000 | 154,015 | 111,326 | 69,584 | 23,410 |
These examples of improving profits, liquidity, cash and debt using the What-If Calculator may appear to be remarkable but for any business that gets its budgets and therefore its forecasts right and rigorously implements them, they are entirely feasible.
Fees associated with financing such as bank, charge card or invoice financing service charges are chargeable to operating profit: Interest charges are not.
Interest charges are a legitimate tax-deductible charge to both the forecast net profit and the foreast taxable profit but as they are solely concerned with servicing external debt / financing as opposed to trading operations, they only apply once the operating profit has been calculated.
Net pre-tax profit only serves as the basis for the calculation of the forecast taxable profit. HMRC then require it to be adjusted to take account of capital allowances and non-deductible overheads.
In the UK the substitution of capital allowances for depreciation of fixed assets is usually the principal adjustment when calculating the taxable profit. Entertainment expenses, fines and provisions are not tax deductible however: These will be added to taxable.
Marginal relief for net profit (net income) below £1.5 million no longer applies as the standard corporation tax rate is now the same for profits of all sizes.
Retained profits after tax is that which is available for distribution of dividends. It is variously referred to in the balance sheet as reserves or shareholders funds forming part of the equity or net worth of the company.
What you see here is an example of Figurewizard's profit and loss forecast. It is automatically created by our system using nothing but your own forecast figures for sales, margin, overheads and investment.
Beyond those figures no further intervention is called for as everything, including VAT transactions and corporation tax are calculated and applied to all forecasts simply from those figures you will have provided.