What Is a Profit and Loss Projection?

A profit and loss projection is a basic financial statement of a particular company that reports on its revenues and expenses in a given period, which can be either weeks, months, or years. It is also a projection of how much money is going to arrive through the sale of different items or services, as well as how much profit you will earn from these sales.

This projection statement is often utilized to guarantee that a sufficient amount of money is flowing in so that the cost of delivering the goods and services are covered, in turn, allowing you to make a profit. This is also used to determine what strategy is needed in order for the business to break even, buying the business valuable time until things start to work towards their favor again.

Main Elements of a Profit and Loss Projection

Listed and discussed below are the main components that make up an effective profit and loss projection statement:

What Are the Types of Profit and Loss Statements?

Profit and Loss Statements can be presented in different types or forms, with each type serving a different purpose. Here are those types listed below:

Multi-Step Income Statement. A multi-step income statement presents subtotals for gross profit and operational revenue, making interpretation and analysis easier. Since it makes analysis a much easier task to accomplish, this is considered an improvement from a single-step income statement.Single-Step Income Statement. A single-step income statement is the most basic version of a profit and loss statement, and it is generally used by small enterprises with fewer line items to report. Only income and costs are subtotaled in this form of an income statement.Comparative Income Statement. In a comparative income statement, the performance for various periods is arranged in neighboring columns. This is the recommended style for financial analysts, and it is frequently used in quarterly and yearly reports.Variance Profit & Loss Statement. A variance profit and loss statement displays performance in comparison to a given benchmark. This benchmark might be a plan or budget used for reporting purposes, or it could represent previous period performance.Common Size Analysis Income Statement. The profit and loss statement for common size analysis depicts all line items as a percentage of a given statistic, often revenues. This sort of income statement is helpful in measuring a company’s performance to that of industry peers of various sizes.Driver Based Profit & Loss Statement. Management and strategy experts prefer this type of profit & loss statement. It is a template that is frequently used in sectors such as mining for planning. It’s also known as a forward-thinking template because instead of decomposing income and costs into fundamental GL account items, the important value movers of the businesses are shown.Composite Profit & Loss Statement. This type of profit and loss statement is a combination or a composite of several different factors thrown together such as references to different spreadsheet models, performance and variance tracked across different periods, a combination of financial and non-financial metrics to be used as a reference, etc.Contribution Margin Profit & Loss Statement. The contribution margin profit and loss statement is used to highlight profit contributions from multiple countries, products, or business divisions. This statement is also intended for internal reporting.

What Are the Advantages of Making a Profit?

Listed below are the advantages that a business can have if they continue to make profits:

Expansion of Business Operations. One advantage of a company that keeps making a profit is that it allows them to expand their business operations. It is critical for a company that wants to grow its operations to be able to make a profit. Earning a profit enables you to build more business sites, purchase another company, target new customers, and expand your activities into foreign territories. The goal of corporate expansion is to boost profits even higher. However, profit is not the only aspect that determines your choice to develop your firm.Hiring of More Employees. Another advantage of making a profit is that your company will be able to hire more employees. Hiring new staff to manage the company’s expanding duties is an element of developing a small business. A small business that is prosperous has a higher chance of being able to pay the salaries of new employees than a company that is struggling financially. Hiring new staff is an important part of operating a small business since employees in smaller businesses are often given greater responsibilities. A company’s owner must devote resources to establishing available employment openings, implementing a hiring procedure, and providing training programs.Ability to Take Loans/Borrow Money. The third advantage that a company that continues to make a profit has is that it enables or gives them the ability to finance money from outside sources. Many smaller companies rely on debt finance to stay afloat. Debt financing requires a company to pay back the money owed to the creditor plus interest. A small business’s debt financing generally consists of borrowing money from a bank. The profitability of a firm influences whether or not a bank will lend it money. A company owner’s credit score and collateral, in addition to earnings, are decisive factors in loan choices. A lender would often view a company that is unable to generate a profit as a risk of default.Attract the Financing of Investors. Lastly, an advantage that a company that consistently earns a profit has is that it will be able to attract investors who will be willing to provide additional funding. To obtain finance for their operations, several small enterprises prefer to bring in private investors. A company that generates consistent profits is viewed as a potentially strong investment opportunity because the investor feels there is a good prospect of earning a decent return on his/her investment. Attracting investors is dependent on your ability to demonstrate the financial benefits of participating in your company. As a business owner, you should be prepared to demonstrate to potential investors your capacity to make profits in prior years as well as your intentions to generate profits in the future.

How to Create a Profit and Loss Projection

Now that nearly everything about profit and loss is familiarized, it is time for you to know about the steps on creating a profit and loss projection. Some steps may be unique to different types of profit and loss projections, which is why they won’t be included here.

  • 1. Get an Estimate of Your Future Revenue

    This is the first thing that needs to be done when creating a profit and loss projection. In this step, you can begin by calculating how much you’ll earn each month over a certain time period, such as the next six to twelve months. Without a doubt, as the title of this step states, this is only a guess. If you currently have a business, you may extrapolate existing sales levels while accounting for major seasonal swings as well as other known variables.

  • 2. Get an Estimate of Your Variable Costs

    After performing the first step, which is estimating your future revenue, you may now proceed to this step which is estimating your variable costs. In this step, you’ll need to approximate the monthly charge to you of the items or services you’ll sell in order to meet your sales target. These are the costs that are subject to change. They’re termed variable, or sometimes incremental since they change based on the number of goods or services produced or sold. For example, if you run a mail-order business, the more you sell, the more you’ll have to spend on shipping fees.

  • 3. Get an Estimate of Your Gross Profit

    Since you’ve already acquired an estimate of your variable costs, it is now time to get an estimate of your gross profit. In order to do this, simply remove your average monthly variable expenses from your estimated average monthly sales income so that you arrive at the end result, which is your projected monthly gross profit. This figure will allow you to calculate how much of each sales revenue you will get to keep. However, you must deduct overhead charges from that amount; whatever is left over is your net profit.

  • 4. Calculate Your Net Profit

    After estimating what your gross profit will be, it is now time to calculate your net profit. This is a very important step because The most crucial figure to calculate is your net profit. This allows you to determine if you’ll have any money left over after paying your overhead charges, or if you’ll be able to at least break even. Make a list of your monthly fixed expenditures, such as rent, payroll, utility bills, insurance, accounting fees, and so on, to arrive at your net profit. To determine a monthly number, divide any yearly costs, such as insurance payments, by 12. Subtract your average expected monthly fixed expenses from your monthly gross earnings to calculate your monthly net profit (or loss). Then, once you’re pleased with your expense estimates for a typical month, fill in the rest for six or twelve months. Then, for each month, deduct your total fixed expenditures from your gross earnings to get your net profit.


What is Gross Profit?

The profit that a business makes after subtracting the expenses of producing and selling its products, or the costs of delivering its services, is referred to as gross profit. A company’s gross profit will show on its income statement and may be computed by deducting the cost of items that are sold from revenue (sales). These data can be seen on the income statement of a corporation. Other terms for gross profit exist, such as sales profit or gross income.

What is the Importance of Having a Profit and Loss Statement?

The importance of having a profit and loss statement is that it demonstrates a company’s income and expenses over a specific time period, generally one fiscal year. In turn, investors and analysts can use this analysis to decide the company’s profitability, frequently combining it with information from the other two financial statements. For example, an investor may compute a company’s return on equity by measuring its net income as indicated on the profit and loss statement to its amount of shareholder equity as shown on the balance sheet.

What is the Cash Method of Profit and Loss Statement?

The cash method of profit and loss statement is only employed when cash enters and exits the company. This is a straightforward system that merely accounts for money received or paid. When cash is received, a firm records the transaction as revenue, and when cash is used to pay bills or liabilities, the transaction is recorded as a liability. This strategy is often utilized by small businesses and individuals who want to manage their own money.

Is a Balance Sheet Different From a Profit and Loss Statement?

Yes, since a balance sheet refers to a type of financial statement that shows a company’s assets, liabilities, and shareholder equity at a given point in time, while a profit and loss statement displays a business’s expenditures, income, and ability to be profitable over a period of time. Balance sheets also serve as the foundation for calculating investor rates of return and assessing a company’s capital structure and also show what the firm owns and owes, as well as the amount of money invested by shareholders. More importantly, it can also be utilized in conjunction with other essential financial accounts to perform basic analysis or calculate financial ratios.

Having a profit and loss projection readily made for your business, no matter how small or big it is will prove to be handy since it allows you as a business owner to identify if your business is profitable (and as a result, still makes it worthy to keep it going) or if your business is making a loss (which gives you the opportunity to improve the way things are run). In other words, this document helps you pinpoint the areas where your business could use a bit of help. In this article, various examples of profit and loss projections can be acquired for you to use as a reference in case you need to make one.