When you get to the end of this section, you should be able to tell whether the company will earn enough money to make the whole process of starting a business worthwhile or not.

Note, though, that this is a basic and simplistic method of estimating net profit. This does not take into account other important considerations such as taxes, dividend distributions and a host of other financial considerations. This is strictly a quick and easy way to gain a basic understanding of the company’s potential.

After you’ve completed this section and think you may want to proceed with the business, bring your calculations to an accountant. Unless you have formal training as an accountant, the best way to provide an in-depth analysis of your company’s financial projections is to have the forecasts professionally prepared. Then you can expand the business plan to include more detail and the accountant’s financial forecasts.

Your Business Plan Writing Assignment:

Follow this sequence to determine the company’s basic net profit forecast:

Estimate Your Net Revenue

First, we’ll figure out how much net revenue the company might make over three years. You do this by multiplying the gross margin estimates you came up with in the Products and Services section by the number of units you hope to sell. Think about how and why sales might increase (or decrease) over the first twelve months. Be conservative, because it’s far better to under-project rather than over-project.

Net Revenue Based on Units Sold for Product #1:

Jan: $4.50 x 20 = $90.00
Feb: $4.50 x 25 = $112.50
Mar: $4.50 x 30 = $135.00
Apr: $4.50 x 35 = $157.50
May: $4.50 x 40 = $180.00
Jun: $4.50 x 45 = $202.50
Jul: $4.50 x 50 = $225.00
Aug: $4.50 x 55 = $247.50
Sep: $4.50 x 60 = $270.00
Oct: $4.50 x 65 = $292.50
Nov: $4.50 x 70 = $315.00
Dec: $4.50 x 75 = $337.50

12-month Total = $2,565.00

Do this for each product or service and then total each product’s net revenue together to come up with a 12-month net revenue forecast for all of your products or services. Let’s say, for our example, we come up with a total net revenue of $150,000 for all of our products for the first year.

Repeat this step for the second and third years.

Estimate Your Expenses

Next, make a list of all your expenses, excluding the cost of the product. We’ve already included the cost of the product in our gross margin projection (it’s the Cost of Goods we came up with in the Products and Services section). To add it as an expense would be redundant.

Think of everything that you’ll be writing a check for each month: rent, payroll, utilities, advertising, insurance, accounting, legal, supplies, loan repayments, etc. Add an additional amount for miscellaneous expenses that you’re not aware of now. Come up with a monthly amount for each expense. Your list will look something like this:

Expenses

Payroll:
Jan: $4,000
Feb: $4,200
Mar: $4,400 etc……..
12-month total payroll =$60,000

Advertising:
Jan: $300
Feb: $400
Mar: $500 etc…….
12-month total advertising = $6,000

Rent:
Jan: $800
Feb: $800
Mar: $800 etc…….

12-month total rent = $9,600

And so on, until you’ve named everything and have come up with a 12-month total for each expense. Then add up each line’s 12-month total to come up with a total 12-month expense for all of your expenses. Let’s say, for our example, we come up with $130,000 in expenses for our first twelve months. Then do the same for the second and third year.

Estimate Your Net Profit

Now, subtract your 12-month expenses from your 12-month net revenue. That amount is your 12-month net profit. The net profit is what you’re left with after you’ve paid your bills:

Net Profit

12-month Net Revenue:  $150,000
Less 12-mo. Expenses:  -$130,000

12-month Net Profit:         $20,000

Do this for the second and third year.

That’s it for the financial section. This is the most basic information you need in order to understand the profit potential of your idea. Remember, this net profit projection is before taxes and other complex accounting issues. Be sure to talk with your accountant about your overall situation, including taxes.

 
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