ChApter 6 | YOUR PROFIT AND LOSS FORECAST | 119
Review Your Profit and Loss Forecast
You’ve now completed your first run
through a Profit and Loss Forecast. Date
it so you won’t get confused if you do
another draft. I hope it looks positive.
How ever, if like many people you find you
need to increase profitability to make the
business a good economic idea, go back
through all your assumptions. How can
you realistically reduce costs or increase
volume? Incorporate into your forecast only
those changes you’re sure are sound. Now
look at the profit figures again. Do they
show enough profit to make a good living,
pay back your money source, and leave
some margin for error? If they do, and
you’re sure the figures are right, you will
want to go ahead with your business idea.
If the adjusted figures still do not show
enough profit, it may be wise to look for
another business idea or change your basic
business assumptions.
Notice that Antoinette’s business looks
more profitable in her Profit and Loss
Forecast than it did in her preliminary
analyses in Chapter 3. That’s because she
increased her first year’s sales estimate
from $400,000 to $450,000 and reduced
her fixed costs from $16,050 to $12,050 per
month. The net effect of these changes was
a slight increase in profit. She knows these
numbers will be hard to achieve, but she is
confident that she can make her goals.
How much profitability is enough to
justify going ahead with your business?
That’s both a good question and a touchyone. Or, put another way, there are almost
as many answers as there are business-
people. My personal response is, I look for
a yearly profit (including my wages and
return on investment) equal to the amount
of cash needed to start the business.
If I need $40,000 to start a business, a
conservative profit forecast would show a
yearly profit of at least $40,000.
One way to approach the issue of profit-
ability is to look at your profit forecast from
an investor’s viewpoint. A $35,400 profit
for the dress shop won’t seem like much
to them. They will be concerned that the
dress shop owner will have a difficult time
earning a living and making it through
the inevitable slow times. An investor or
lender will probably want her to be able to
convincingly demonstrate she has a plan
to increase sales enough to raise the profit
forecast to a more respectable level—say,
the $46,200 she shows in the second year.Your Profit and Loss Forecast
and Income Tax Return
Figuring out your business’s income tax
return involves more calculations than we
have shown so far. One major difference
involves cost of sales, which we have
viewed as a simple percentage of sales for
forecasting purposes. You’ll need to follow
more complicated rules when computing
your business income tax return. Read
below to learn how to spot employee
theft. You can skip this discussion if your
business has no inventory.