Turnover and Income (profitability forecast)

The decisive factor for your company will be whether it is worth setting up a business or not. You should be able to support at least yourself and your family with it. The profitability forecast provides you with an indication of this.

Therefore ask yourself:

  • What profit will my company make?
  • How are revenue and earnings distributed?
  • Have I prepared a detailed profitability forecast?
  • How do I plan to increase the profitability of my business?

Target of the profitability forecast

With the profitability forecast you can take a close look at these points:

  • Is my project worthwhile?
  • Can I convince my investors of the economic viability of my business idea?
  • I check my set targets with the instrument.
  • I detect deviations from target and actual figures.

In principle, it is a matter of comparing revenue and costs to determine the profit. The proof that the company is profitable is called the profitability forecast or ‘profit and loss forecast’. Banks and other investors generally expect such a forecast for three years, because only companies that show profits in the preview period are an acceptable investment. In practice, however, it is not sufficient to show a profit in the actual core business (operating result). It is important that the profit is sufficient to cover all other expenses (e.g. for private living, interest and tax expenses). Only if this broader “company result” is also positive will you make a profit overall.

Tip: The profitability calculation provides important information on the creditworthiness of your company. This plays an important role in lending. The better the credit rating, the more likely it is that a loan will be granted and the more favourable the interest rates will be for bank loans and promotional loans (e.g. from KfW).

Practical profitability forecast

The free business planner of the Gründungswerkstatt will help you with the preparation of the profitability forecast. It is of course difficult to create a profitability forecast if you do not yet have your own business. Your planning will most likely later turn out to be wrong. Nevertheless, this calculation is particularly interesting, because you develop a good feeling for your expenses. It ensures that you control the total costs very carefully right from the start and know exactly which costs you can adjust, which are your biggest spending items, etc.

Plan income and expenses

The following generally applies: The profitability forecast is used to simulate your profits and losses for the next three years. You should therefore enter all expenses and income that are expected to be incurred in the “Finance plan/profitability” tab. At the end of each month or year, the difference shows you the profit earned (if the income is higher than expenses) or loss incurred (if the expenses are higher than income). In a first step, the (current) operating expenses belong to the planning of expenditures. These include: rent, ancillary costs, staff, social security contributions, interest, charges, motor vehicles, consultants, insurance, administration, telephone, etc. In a second step, you have to take into account the one-off start-up costs. These are not particularly relevant for the planning of running costs. However, they will drive up costs in the first year of the business. In a final step, calculate any imputed costs incurred.

Example: Imputed costs are incurred if the office space you use belongs to you. Although you do not pay rent to yourself, there are costs because you could also alternatively rent out your office space. You must include this lost income (here: imputed rent) in your calculations, otherwise you would make the return of your start-up project look better than it actually is.

Planning revenue is somewhat more problematic than estimating costs. Unlike most costs, the revenue cannot be estimated quite as directly. Are the product, the price, the distribution, and the advertising right? Have any competitors been overlooked? How will the competition react and was the right target group addressed? These are all questions that have to be considered in advance.

The following factors will help you with your sales planning:

Market analysis

This includes researching comparable companies and potential customers yourself. Surveys, interviews, observations and statistics help you to estimate the market size, the number of competitors and the market share at which you are aiming.

Industry figures

These are average values of your competitors (e.g. sales per employee) and help you in assessing the planned turnover. Are you considering how much you will deviate from the average? Are you better/worse than the industry? Do you have the resources to compete right from the start? Industry comparison figures are often available from the Chamber of Industry and Commerce, the Chamber of Crafts and Trades, professional associations, the regional tax office (Oberfinanzdirektion), trade fairs, the Sparkassen and Volksbanken, the Federal Statistical Office and its regional offices, and DATEV (via your tax advisor).

Example for the calculation of turnover in retail trade:

  • 5 sales per hour,
  • results in 40 sales per day (with 8 hours opening time per day),
  • results in 40 x 22.5 sales per month = 900 sales
  • (with an average of 22.5 opening days per month, i.e. excluding Sundays, public holidays and expected sick days),
  • average turnover per sale: EUR 15,
  • results in a turnover of 900 x EUR 15 = EUR 13,500 per month

Tip: Calculate both the best and worst case. The worst case definitely tells you if you can make a living from this turnover. Be honest about it.

Mistakes in the profitability forecast

The following mistakes are often made in the profitability forecast:

Cost items are forgotten

Check whether you have really considered all costs. Seemingly incidental costs are frequently simply forgotten in the planning process. Even possible price increases in purchasing are often neglected. To be on the safe side, schedule a current “Miscellaneous” item.

Compared to the industry as a whole, costs are underestimated

Compare your costs with industry benchmarks. If there are deviations, ask yourself whether and how these can be justified.

No cost increases are taken into account in the event of rising sales

If you expect increasing sales, you should bear in mind that this often means additional costs on the production side.

The planned revenues cannot be realised for capacity reasons

Think about how many of your products or services you need to sell in order to achieve your planned turnover. Can you realistically produce this quantity with your existing capacities (e.g. time)?

The planned turnover does not correspond to the expected demand

There can be several reasons why your products or services do not sell. If your offer does not satisfy the demand, i.e. if it does not meet the needs of the customers, you should make adjustments.

Example: A baker only sells rolls and needs a monthly minimum turnover of EUR 5,000 to cover costs and private withdrawals. He wants to sell his rolls for EUR 0.25. He is open 20 days a month, which means that he needs daily sales of EUR 250. Can the baker realistically sell 1,000 rolls a day?

Review of the profitability forecast

Continuing to use your business plan figures after setting up the company will make you a real “professional”—your figures will have to be controlled in any case.

Controlling in practice

This requires two things: monthly updates and regular analysis of the figures. You should therefore regularly compare the values in the profitability forecast with the actual values. Use the management analysis for this, as it provides a realistic picture of the company. If the deviations become too large—positive or negative—there is need for action. Get to the bottom of the causes: Are they temporary or permanent influencing factors? Think about appropriate measures. You can also see whether the purely operational part of your business is making a profit and how external income and expenses (e.g. interest) have affected your bottom line. Use the profitability forecast also as a basis for your cost and sales controlling!

Tips for increasing profitability

The lower the costs and the higher the revenue, the better the profitability of the company. A company that wants to save costs must above all design its processes efficiently and optimise its cooperation with customers and suppliers.

How you can reduce costs:

  • Office equipment, machines, vehicles, etc. can often be bought at a lower price. But: Pay attention to the warranty and the external appearance. Overly humble-looking equipment can deter customers.
  • Check whether the premises you are using are too large and consider whether you can sublet them.
  • Companies that manufacture the same products or trade with them can use each other as cooperation partners to negotiate more favourable purchasing conditions with suppliers, for example.
  • Compare the purchasing conditions of several suppliers with each other and calculate the offers precisely.
  • Encourage yourself and your employees to consume energy and raw materials (e.g. office supplies such as paper) in an environmentally conscious manner.
  • Leasing of vehicles, machines etc. can noticeably relieve your start-up budget. But: Generally, leasing is more expensive in the long run.

How you can increase the revenue:

  • Continually adapt your marketing measures to your customers’ needs and wishes.
  • Compare your offer with those of your competitors regularly.
  • Observe and survey your target group according to their wishes. Use their preferred media as a source of information.
  • Review your pricing strategy. Find out what is common in your industry and what your customers expect.
  • Perform acquisition on a regular basis and make sure that your product really meets the needs (problems) of your customers.
  • Motivate yourself and your employees to work in a customer-oriented manner.
Sample text: Revenue and earnings (profitability forecast)
A turnover of EUR 50,500 is planned in the first year, with expenses of EUR 71,500, resulting in a negative operating result of EUR 21,000 in the first year. We will not cover our costs in the first year, but a higher price will not be possible due to the competitive situation. In the second year, with a turnover of EUR 92,000 and expenses of EUR 78,500, a profit of EUR 13,500 is to be achieved. In the third year, we estimate a turnover of EUR 154,500 and expenses of EUR 127,500, resulting in an operating result of EUR 27,000.