Your profit and loss forecast is a key part of your business plan as everything feeds into it; strategy, proposition, pricing, vision, mission, objective, your operational model and the cost of it, and obviously what you’re able to take out of the business for your profitability is all part of that big picture.

To begin, find out what your CRM offers by way of a template, or research those available through Excel or Google Sheets.

Step one: Find your break-even value

Start with what you know or can best calculate. Initially, overhead costs where spending trends or patterns will be evident if the business has been around for a year or more. Your overheads are often your known costs or those that can be more easily calculated for your forecast. Don’t forget proposed new spends or any known changes. If you’re a start-up business and overheads are all new or still anticipated, you may need to ask for quotes and do a little bit more research with potential suppliers. Then apply an indexation to anticipate price increases from suppliers, and finally consider what new expenditure you have planned for next year; new premises, additional staff, upgraded IT or security and so on.

Remember: Allow for what you need to take from the business in terms of salary, dividends and one-off costs, especially as a start-up, or growth investment as an established business.

By doing this, you will now know what you need to generate in sales to at least cover your overheads and personal income expectations. It will also highlight to you what you need in reserve to create working capital which is so important when you start or grow your business.

Step two: Identify costs associated with your sales

To make up your forecasted sales , go back to the numbers in your business and consider;

  • Number of customers
  • Average sale value
  • Number of times they buy

Hint: this will also help to shape your target audience and offering.

What are your direct costs?

  • Any costs directly related to your sales (eg to build your product or deliver your service) – this should correlate with a target or perhaps industry gross margin
  • Software licenses
  • Subcontractor or associate rates
  • Marketing budget
  • Mileage
  • Referral incentives
  • Rent.

My advice when creating a sales forecast is:

  • Be prudent
  • Look at historical patterns
  • Allow for seasonal variations
  • Plan for market changes, both expected increases and unexpected decreases in demand
  • Identify the value of the gap between what you expected vs what really happened – do you need financing, or can you wait it out?

Step three: Calculate your margins

Tip: Don’t plan to spend X% if you only achieved Y% last year unless you can justify the added expense AND expect to achieve at least X% in return.

Look at your margins from previous years; your gross and net profit margins and your productivity ratio of staff costs to turnover. Those trends can be mapped into your forecast, and again, if you’re a start-up business, you can use what information you have and do a bit of research to establish your best expectations.

Step four: Sensitise your profit forecast

Once you have gone through all of the above, you will have established your profit and loss account for the following year, with these figures:

  • Overheads
  • Income
  • Sales and direct costs
  • Minimum gross profit required
  • Net profit margin that we desire.

When we know what to expect, sensitising the data to prepare for the unexpected means looking at ‘what if’ scenarios. What might happen that could impact on your profit improvement or cause under performance? For example:

  • If your profit target achieved over or under your expectations by 20%, how would your overheads be adjusted to reflect that?
  • If you lost a key member of staff, or customer what would the impact be? If you suddenly received notice on your offices and had to move, or if your supply chain broke incurring higher costs, what would the impact on your business be?
  • You suffered a pandemic lockdown!

Preparing for scenarios like these prevents you from going into panicked fire-fighting mode because it’s all in the plan on how to deal with it.

Remember: Trigger points. Have a program of action to take in certain scenarios.

My advice for adding sensitivity to your forecast is to consider your risk aversion, past experience and motivations.

Conservative values

  • Low price points
  • Single market channels
  • No sales staff
  • One new product or service introduced every other year.


  • Higher price for premium product
  • Three to four marketing channels
  • A marketing manager, and two sales people on commission
  • Minimum of one new product or service each year.

Tip: If in doubt, aim for the more conservative values so you will be more likely to experience success.

Step five: Think about HMRC

Let’s not forget our friends at Her Majesty’s Revenue and Customs! Work with your accountant to help you allow for the following:

  • Tax profits
  • Distinguish between the tax treatment of salaries and dividends
  • Include VAT payments in your cash flow (show the difference between net and gross)
  • Putting money aside to allow for VAT and tax liabilities.

Best practise when preparing financial forecasts

  • Update your budgets regularly with actuals
  • Forecast your balance sheet position (especially if you’re looking for finance or have to provide information to lenders or investors)
  • Run the forecast out for 2-3 years with indexation and growth plans to see how the vision evolves
  • Use the profit and loss forecast to create an understanding of your cashflow
  • Share it with someone who can give constructive feedback and accountability.

Making profit is vital | Making the right level of profit is important | Generating positive cash flow is crucial

Because, turnover is vanity, profit is sanity, but cash is reality!

And my final tip: Keep your forecast fluid, as a working document, much like your business plan; review it and update it with what actually happened. Don’t hide it away to collect dust!

This article was taken from module seven of my Online Business Development Programme, which many people have signed up to this month, accessing 12 modules to support their business growth. Once you have signed up, you have lifetime access to work through the modules in your own time.

Find out more about the programme by visiting the Online Business Development Programme website.

If you’re looking for someone to share your forecasting with, I will gladly share my experience with you and provide that constructive feedback to help you achieve a brilliant financial forecast. Just get in touch with me to arrange a call. And if you’re still unsure on how important a financial forecast is, please look back at part one – How important is a profit and loss forecast?

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