Forecasting Profit and Loss for Your Business Ideas
Updated: Jun 14
Do you ever find yourself coming up with business ideas, yet it seems you never take action? This quick guide to assessing business opportunities for entrepreneurs and small business managers can help you take the next step to generate new income.
Predicting Profit and Loss
First, it all starts with a product or service and selling these items. Your sales are your revenue or the top line of your income statement. It is a good idea to invest in Quickbooks self-employed to track all of your expenses and income. Accordingly, there is a cost associated with your sales, typically your cost of sales (COS) or the cost of goods sold (COGS). These include the purchases for inventory, shipping, packaging, and materials to ship or deliver on agreements with clients, paid labor for production, and costs associated with converting revenue.
Sales $ minus COS/COGS = Gross Margin or Gross Revenue
Gross Margin + COGS = 100% of sales
Second, there are expenses associated with operating your business or entity. These operating expenses (OPEX) refer, to payroll or owner draw, leases, insurance, office supplies, monthly subscriptions, internet, technology, telecommunications, advertising, and administration, to name significant expenses. To determine the percentage of operating expenses to sales, add your monthly or annual operating expenses and divide it by sales for the same period.
Add up all operating expenses divided by total sales = OPEX as a percent of sales
Third, if any sales dollars are left over, you have a net operating margin (NOM) or earnings before interest, taxes, depreciation, and amortization (EBITDA). Congratulations, not all business opportunities yield a positive net margin. NOM is also called net operating income (NOI).
Sales $ minus COGS minus OPEX = NOM
Company ABC generated $120,000 in sales last year, and for years the COGS have been 40%. The company does not know what percent of sales attribute to OPEX, but the bookkeeper calculated $70,000 in OPEX last year.
To find the $ amount of COGS; take sales multiplied by COGS 40% or 0.40 as decimal
$120,000 x .40 = $48,000 COGS
To find the percentage of OPEX to sales, then take OPEX divided by Sales
$70,000 / $120,000 = .583 or 58.3%
To find all expenses: Add the COGS $ amount plus OPEX $
$48,000 + $70,000 = $118,000 total COGS and OPEX
To find NOM, take sales minus all expenses (COGS+OP EX)
$120,000 - $118,000 = $2,000 NOM, or EBITDA
To find the NOM percent, take net margin divided by sales
$2,000 / $120,000 = 0.0166 or 1.66%
Another way to find the net operating margin, is take gross margin minus OPEX
Gross margin = 60% since we know COGS = 40%
60% - 58.3% (OPEX) = 1.7%
Small Business Profitability
Depending on the details of this example, this business would potentially yield a profit in an ideal situation with no debt, assuming there are no cash flow issues or other anomalies.
We are not suggesting a small EBITDA means that this opportunity is right for you, but you can quickly assess if you want to explore the business deeper.
Remember to take action on your ideas, seek help, and create new opportunities!
Learn more on How to Create & Implement a Financial Growth Plan here