In a profitability forecast, also known as an income forecast or profitability plan, you forecast the future income and expenses of your company over a certain period of time (usually three years). You compare the expected turnover with the expected costs to determine whether your company is likely to make a profit or a loss.

The profitability forecast is an important tool in financial planning and part of the business plan that you should prepare, especially when setting up a company. However, it can also look at the earnings situation of an existing company by comparing the funds used with the turnover generated.

profitability forecast with foresight

Precise profitability planning has the following advantages, among others:

  • Planning certainty: It helps to assess the profitability of a business and plan whether it is likely to make a profit or a loss.
  • Decision-making: By providing a realistic outlook, it assists with important decisions such as investments or borrowing.
  • Persuasion: A plausible profitability forecast is necessary to convince lenders (e.g. banks, investors) of the company’s creditworthiness.

In principle, a profitability forecast is always useful for estimating the future profitability of your company. In some cases, however, it may be particularly advisable or even necessary:

  • If you are starting a business and want to know whether the business model will pay off at all
  • If you are looking for investors and want to convince them to invest in your company
  • If you are about to make radical changes to your company that could have a major impact on profitability

You can easily create a profitability forecast in just a few steps:

  1. Revenue and cost planning: Create a detailed list of your projected revenues and expenses over the selected time period (usually 3 years).
  2. Profit and loss account: For each year, compare projected sales to projected costs and determine whether your business is expected to make a profit or loss.
  3. Profitability analysis: Using the values determined, calculate how profitable your business will be in the future.
  4. Documentation: Record the profitability forecast in your business or financial plan.

Create profitability forecast

Year 1 Year 2 Year 3
Expected sales
Sales of goods - - -
Sales of services 50,000 125,000 250,000
Cost of goods sold - - -
= Gross profit 50,000 125,000 250,000
Expenses
Personnel costs 30,000 60,000 120,000
Rental costs 10,000 10,000 25,000
Insurance costs 3,000 5,000 7,000
Vehicles/leasing 3,500 3,500 7,500
Travel expenses 2,500 4,000 8,000
Marketing/advertising 5,000 7,500 10,000
Telephone/Internet 600 700 1,000
Office/Administration 500 500 500
External consultants 2,000 2,500 3,000
Interest on loans - - -
Other expenses 1,500 2,500 3,500
= Total of all costs 58,600 96,200 185,500
Depreciation 2,000 2,000 2,000
Operating result -10,600 26,800 62,500

Turnover includes all income from the sale of goods and services. If you deduct the purchase of goods and materials from turnover, you will receive your gross profit. This step is not necessary for pure service providers who do not have any cost of goods.

The operating result is the profit or loss before tax. You can easily calculate this by deducting the total of all costs and depreciation from the gross profit:

Earnings before taxes = gross profit - costs - depreciation

Once your profitability plan is in place, you can use the figures to calculate profitability and carry out a sound profitability analysis.

Profitability is used to calculate how much profit your company generates in relation to sales or capital employed. The result is therefore always a percentage.

How high should the profitability of a company be?

In general, a profitability of 5 to 10 percent is considered good, 10 to 15 percent very good and above that excellent. However, these benchmarks can vary greatly depending on the industry and market conditions. It is best to compare the profitability of your company with the profitability of companies with which you are in direct competition.

The first important key figure for your profitability forecast is return on sales. This measures the share of profit in your company’s turnover. The return on sales formula is:

Return on sales = (profit / sales) × 100

Example: Your company achieves an annual profit of 15,000 euros with a turnover of 150,000 euros. The return on sales is therefore (15,000 / 150,000) × 100 = 10 percent.

A high return on sales is an indicator of the efficiency and competitiveness of your company. It is often highest for market leaders, as they can achieve high margins. However, to increase your return on sales, you can also increase the speed of sales by reducing your stock levels or shortening the payment terms for your receivables.

The return on equity shows the rate of return on the equity you have invested (the owners’ investment). This results in the return on equity formula:

Return on equity = (profit / equity) × 100

Example: You invest 50,000 euros from your private equity in a new company of which you are the sole owner. In the first year, your company makes a profit of 5,000 euros. You can now calculate the return on equity. The profitability analysis results in (5,000 / 50,000) × 100 = 10 percent.

It is worth investing equity if the expected return on equity is higher than the return on other forms of investment on the capital market (e.g. shares).

The return on debt describes how much interest is paid on the borrowed capital - for example, whether it is economically worthwhile to take out a loan. The formula for the return on debt is:

Return on debt = (interest on borrowed capital / borrowed capital) × 100

Example: A bank has lent your company 100,000 euros and receives 7,000 euros in interest per year without repayment. The return on debt is therefore (7,000 / 100,000) × 100 = 7 percent.

A higher return on debt means a higher interest burden or higher costs for your company. Compared to the other ratios, this type of profitability is therefore not advantageous for you, but only for external investors. In principle, this value should be lower than the return on assets.

With the return on assets, you calculate the profitability of a company taking into account equity and debt capital. This is reflected in the return on assets formula as follows:

Return on assets = ((profit + interest on borrowed capital) / total capital) × 100

To simplify the profitability forecast, we use the figures from the last two examples, i.e. EUR 5,000 profit, EUR 7,000 interest on borrowed capital and EUR 150,000 total capital, which is made up of EUR 50,000 equity and EUR 100,000 borrowed capital. The total return on capital corresponds to ((5,000 + 7,000) / 150,000) × 100 = 8 percent.

This value looks good at first, but is only just above the return on debt. This means that although profitability is present in this example, it is not very high overall. This is also clear from the next key figure.

Return on investment is the ratio of a company’s profit to total capital employed, without including interest on borrowed capital. The formula is therefore as follows:

Return on investment = (profit / capital employed) × 100

In the above example with a profit of EUR 5,000 and capital employed of EUR 150,000, the return on capital employed is only (5,000 / 150,000) × 100 = 3.33%. This shows that the profitability of a company with these figures is rather low.

Return on capital

In general, you should always consider several profitability ratios together when analyzing profitability in order to interpret the results realistically. You should also draw up a capital requirement plan to ensure a coherent strategy with regard to the use of capital.

Of course, you can not only determine the profitability of a company, but also calculate the profitability of individual investments, for example in projects or production facilities. To do this, you create a profitability forecast for the respective options. The profitability comparison calculation provides a method for comparing the profitability of different investment alternatives.

Example: Imagine you have to decide between two projects, each with a term of one year. The first project promises a profit of 5,000 euros and would cost 40,000 euros. The second project offers profits of 15,000 euros. However, you would have to invest 150,000 euros for this. In this example, we use the formula for return on capital to calculate the profitability.

Profitability of project 1 = 5,000 / 40,000 × 100 = 12.5 percent

Profitability of project 2 = 15,000 / 150,000 × 100 = 10 percent

Both projects would be profitable, with the second project yielding 10,000 euros more profit. However, according to the profitability comparison calculation, you would still have to opt for project 1, as it is even more profitable and involves fewer risks due to the lower capital investment.

The following points are essential to ensure that your profitability planning is successful and secures the long-term success of your company:

  • Realistic sales planning: Your sales forecasts should not be overly optimistic and should be based on thorough market analysis and likely scenarios.
  • Detailed cost breakdown: Take into account all operating costs, e.g. cost of goods, personnel costs, insurance, energy costs and rent.
  • Careful calculations: Do not rely on your gut feeling, but use the above key figures and calculate them carefully.
  • Plan for a liquidity buffer: It is better to set your expenses too high and your income too low in order to be able to cope with unforeseeable cost increases or sales slumps in case of doubt.
  • Close-meshed controlling: In order to recognize deviations from the profitability forecast and to be able to initiate countermeasures at an early stage, you should check the figures at regular intervals.

This depends entirely on how high the anticipated losses in your profitability forecast are and what situation your company is in. For example, it is completely normal for the first few years of a business start-up to be characterized by losses. As long as these do not threaten your liquidity and a turnaround is foreseeable, you do not need to worry here.

If your profitability calculation is too negative, this means that your company is not profitable. You can now do the following, among other things:

  • Cut costs: Perhaps you can do without expenses, such as company cars, or find cheaper alternatives.
  • Improve revenue: Rethink your business model. Can you possibly address additional target groups or even charge higher prices for your products/services?
  • Raise awareness: Are there cost-effective marketing measures that will reach many potential customers? Be creative and advertise your offer.
  • Seek help: Get help from advisors who know about finance and have your viability planning reviewed.

The profitability forecast is an indispensable tool for assessing the financial viability of a company. It provides information on how efficiently a company operates with the capital invested and what operating results can be expected. The profitability ratios presented provide you with valuable insights into whether your company will be profitable in the long term.

Profitability forecast - outlook

You should create a financial plan to keep an eye on your company’s turnover and costs at all times and to be able to estimate profits or losses. Powerful database software such as SeaTable is ideal for this.

In SeaTable you will find all the functions of a spreadsheet (e.g. a user-friendly formula editor) combined with the power of a no-code database and an intuitive App Builder . So nothing stands in the way of a clear profitability forecast.

What belongs in a profitability forecast?

The most important steps in a profitability forecast are sales and cost planning, the profit and loss account and the calculation of profitability using various key figures. The profitability plan is in turn part of the business or financial plan.

Which indicator best characterizes the profitability of a company?

Two basic ratios to measure the profitability of companies are return on capital and return on sales. You can gain more detailed insights from the return on equity, return on debt and return on assets. It is important that you never look at the profitability ratios individually, but together in order to get a complete picture and draw the right conclusions.

How do you calculate profitability?

To calculate profitability, you need either the profit and turnover or the profit and capital employed in a given period. The formula is as follows:

  • Return on sales = (profit / sales) × 100
  • Return on capital = (profit / capital employed) × 100

How can you calculate the return on assets?

With the return on assets, the return on equity merges with the return on debt to form one key figure. This can be defined as the sum of profit and interest on borrowed capital divided by total capital:

((profit + interest on debt) / total capital) × 100

What is a good value for profitability?

In general, a profitability of 5 to 10 percent is considered good, 10 to 15 percent very good and above that excellent. However, these benchmarks can vary greatly depending on the industry and market conditions. You should therefore compare your profitability forecast with the profitability of companies in your own sector.

TAGS: Finances