In today’s session, John takes us through creating an Annual Profit Driven Budget Forecast and shares how this tool can help businesses keep finances on track.
ANNUAL PROFIT DRIVEN BUDGET FORECAST
An annual profit budget forecast shows an expected income, expenditure and profit for a business over a particular period. It actually tells you how much profit you’ll likely to expect from any particular level of trading. And it is absolutely crucial to your business success to have an accurate and timely and financial information that you can draw upon.
BREAKING UP THE FORECAST FOR PROFIT
- Calculate your estimated annual sales and divide it to monthly sales. Take in to account seasonal and monthly trends.
- Look at the total material used. Do this by calculating the added purchases in opening stock then subtracting your closing stock.
- Calculate cost of sales. Add total materials used to total labor/direct labor.
- Calculate by gross profit by subtracting the cost of sales, look at gross profit percentage and use the formulas available at website – www.ceo-ondemand.com.au and www.moreprofitlesstime.com
- Calculate net income by adding your gross profit to any other income earned
- List estimated overhead expenses. Divide annual expenses in to monthly amounts.
- Calculate net profit. Pay your taxes first before computation.
- Calculate break even sales level. Identify the minimum sales level to break even (i.e. not to make a profit or loss)
Spreadsheets, templates, calculators, formulas and other tools available at:
CEO on Demand website – www.ceo-ondemand.com.au
More Profit Less Time website – www.moreprofitlesstime.com
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TRANSCRIPT: PODCAST EPISODE 18
Title: Annual Profit Driven Budget Forecast
Date Published: October 5, 2015
Running Time: 08:11 minutes
Hi this is John Millar, and I’m the naked business coach, stripping business back to the bare basics. In today’s session I’m gonna talk to you about creating an annual profit budget forecast. Now, we’re in business to do one thing, make money. Where there’s lots and lots of other things, we make money to support people, we make money to be able to contribute back to the community. We make money to be able to support our family and our loved ones. But at the end of the day, if you’re not budgeting for profit, you’re in also to strife. Because its profit that you actually have as your money.
Now, then your profit budget forecast shows an expected income, expenditure and profit for a business, over a particular period. It actually tells you how much profits you likely to expect from any particular level of trading. And its absolutely crucial to your business success to have an accurate, and timely financial information, that you can draw upon. Not any of that, but to be able to understand what it means.
Without these factors the business can’t detect major changes promptly, take early actions to create unfavorable situations or to capitalize on favorable ones. The profit budgets does not reflect your cash position. Your cash position is completely separate – and that’s a whole other podcast. It contains non-cash items, such as depreciation, creditors you have not yet paid, invoices raised but for which no cash has been received. It also excludes any payment of loans.
Once you’ve actually completed your annual profit budget forecast, we recommend that you assess your forecast to determine if you got sufficient cashflow to meet your debts, as they fall due. It’s very important again not to confuse your profits with cash flow. Many people in small business prepare and use budget themselves, while others use advisers, business coaches, accountants and a bookkeeper. It’s a matter of what the business owner can do and chooses to do. And the reality is, you should be using all of those experts and more to support yourself in your business.
Now make sure that you’ve got a provision for your GST. Here in Australia we have what we call Goods and Services Tax. Uou must put that money away. The money that you received will include GST and too many people see money in the bank as their profit and it may not actually to be yours. Overseas tis quite often called a VAT or Valued Added Tax, and a lot of other things, but that’s what we called it here.
Now to obtain an accurate P&L or Profit and Loss budget, you gotta exclude that GST or VAT when calculating or inserting amounts for sales and all of expense items. This also applies when calculating your gross margin, your break-even analysis and any other financial management ratios that you using to benchmark your business. If you do not excludes GST from all of these amounts, these amounts will be inaccurate, coz they’ll actually be under or overstated. Please note that GST Attributes of each business will vary, so specific advise from your tax adviser is really strongly recommended.
Now if you like an annual profit and cash flow forecast spreadsheet and some instructions, feel free to email us or check it our website because they’ll be freely available at ceo-ondemand.com.au or moreprofitlesstime.com.
First thing you need to do when you’re breaking up that forecast for profit is actually to calculate your estimated annual sales and then divide it in back into monthly sales. Now, make sure that when you do that you take into account seasonal or monthly trends. You just can’t simply get an annual figure and divide it by 12.
Step number 2. Make sure you look at those total material that you used by calculating the added purchases and opening stock then subtracting the closing stock. When calculating purchases, remember to take into account the extra stocks that is required prior to seasonal sale increases.
Step 3. Calculate your cost of sales by adding the total material used to the total labor or direct labor in subcontractors.
Step 4. Calculate your gross profit, by subtracting the cost of sales, work out your gross profit percentage, and use the formula that we’ll be able to supply you if you request it from our website.
Step 5. Calculate your net income by adding your gross profit to any other income that you may own. Other income that is not being derived from sales could include things like profit from the sales from a business asset, plant and equipment, shares, bonds, that sort of thing.
Step 6. List your estimated overhead expenses. Divide your annual expenses into monthly amounts which can be calculated into two methods. One method is the expenses which are fixed, or those don’t vary according to the sales of general business activity. These are things like your rent, rates, tax, outgoings, liscenses, permits and insurances. All of those sort of things are going to happen whether you make sales or not.
The anticipated cost for 12 months should be divided by 12 to determine the monthly proportion of these fixed expenses. You may in fact want to be able to gauge them up or down depending on the seasonal income that you’ve got as well, but making sure that you’ve calculated and put the money aside for those areas.
Those expenses which are variable or those vary according to sales and business activity – things like advertising, credit card fees and the like – should be first calculated to reflect your planned business activity . Then the projective cost relating to the specific months should be included in the relevant monthly columns. Other months will actually reflects the cost of normal advertising . Any amounts taken by the owners from the business for personal living or other expenses are classified as drawings or in other words an advance against profit. And these are not included in the profit budget. Remember, pay yourself out of your profit.
Step 7. Calculate your net profit before tax. Tax is normally calculated on how much profit you make. Make sure that when you put aside enough cash by using an annual cash flow forecast, that you pay your taxes first. This would also include making provision for both pay as you go taxes and things like goods and services tax. We also recommend that you engage a very competent tax adviser or accountant or bookkeeper or both preferably to assist you with minimizing your tax repayments and whilst you’re complying with all tax offers laws.
Your break-even analysis. This is where you identify the minimum sales level that you will need to break-even, i.e. not make a profit or a loss. Calculate this for the beginning of the year and again at the end of the year for comparative purposes. And again we’ve got some wonderful calculators that you can use.
This has been John Millar and I’m the naked business coach, stripping business back to the bare basics . I hope you’ve got some really simple steps in being able to put together in your annual profit budget forecast. If you’d like spreadsheets and break downs of actual formulas that you can use, please contact us through our website – they’re free of charge at ceo-ondemand.com.au or moreprofitlesstime.com.
Either way, we look forward in helping you and serving you. And I look forward in talking to you in the nex podcast. Until then, this has been John Millar the naked business coach signing off so that you can a profitable and enjoyable day!