ChApter 6 | YOUR PROFIT AND LOSS FORECAST | 103
that the money coming in will exceed the
money going out by a healthy margin.
In Chapter 3, you completed a rough
break-even analysis for your business. That
analysis helped you decide whether you
chose the right business. Now we are going
to take a closer look at those numbers
and develop them into a comprehensive
forecast of your business’s future profits. (If
you did not complete or don’t remember
the work you did then, review the section
in Chapter 3 entitled “Break-Even Analysis:
Will Your Business Make Money?”)
Your business’s profits result from three
specific dollar figures:
• Sales revenue. This is all the money you
take into your business each month,
week, or year. It is also called “gross
sales,” “sales income,” or simply “sales.”
• Cost of sales. This is your direct cost
of the product or service you sell.
Sometimes it is called “direct product
cost,” “variable cost,” “incremental
cost,” or “direct cost.”
• Fixed expenses. These are sometimes
called “overhead,” and you must pay
them regardless of how well you do.
Fixed expenses don’t vary much from
month to month. They include rent,
insurance, and other set expenses.
They are also called “fixed costs,”
“operating expenses,” “expenses,” or
“discretionary costs” (discussed in the
section in Chapter 3 entitled “Break-
Even Analysis: Will Your Business
Make Money?”).In a given period, you make profits
when sales revenues exceed your total
cost of sales and fixed expenses. To put it
another way, sales revenue minus both cost
of sales and fixed expenses equals profits
or losses for a given time period.
Our job here is to examine closely all
the above numbers and, once you are con-
vinced they are right, to present them on a
month-by-month basis for two years. Two
years is enough time to see if any short-
term problems or long-range trends begin
developing. Of course, you can change the
time frame if necessary. For instance, if
you are starting a beer stand for the annual
county fair or a vineyard with a five-year
growing cycle, a different time frame will
make sense for you.CD-ROM
A copy of the Profit and Loss Fore-
cast is included on the CD-ROM in Excel
spread sheet format. You can find it under the
filename ProfitForecast.xls. Note that formulas
have been embedded in the spreadsheet
document so that it will automatically
calculate relevant totals.Determine Your Average Cost of Sales
Your first step in your profit and loss
projection is to determine your average
cost of sales—that is, your direct cost of
the products or services you sell. You’ll use
the Sales Revenue Forecast you completed
in Chapter 3 to make this estimate.