You’ll often hear or see the advice that you should create a profit and loss forecast for your business. In fact, you may have heard it from me.
Forecasting how much you will earn and what expenses will be necessary is an essential step to set appropriate prices for your services (and products, if you have any), and accurately predict your costs. It’s the only way to know whether your business — as currently designed — will bring in enough income to be a sustainable enterprise. But what does such a forecast include for a self-employed professional?
Here’s a sample P & L forecast for a professional services business that includes projected sales revenue, direct cost of sales, and typical overhead expenses, entered in an Excel spreadsheet that you can modify for your own use.
You can use this template to model how you will price your services, and what you expect your sales volume (number of sales) to be. The Sales Revenue example in the worksheet shows a consultant who offers a monthly retainer package for $1000, and bills by the hour at a rate of $150. The consultant also delivers a quarterly workshop that costs $250. The worksheet calculates how much the consultant will earn in a year with 2-4 retainer clients, billable hours of 20-40 per month, and 20 students per quarterly workshop. As you revise the prices or number of clients, hours, or students, the gross revenue and net profit shown will change accordingly. You can also add additional rows to better model how you offer your own services.
Below the Sales Revenue section, you’ll see Direct Cost of Sales. This is where you estimate any costs that will vary depending on how many sales (or what kind of sales) you make in a given month. The example in the worksheet includes credit card fees, calculated as 75% of the total sales revenue times 3%. This assumes that 75% of your sales are paid for by credit card, and your average credit card processing rate is 3%. There’s also a cost shown of $500 once per quarter to rent workshop space. Once the Direct Cost of Sales is deducted from Total Sales Revenue, you’ll see your Gross Profit — your profit before you deduct expenses.
The third section of the worksheet shows Expenses. These may vary throughout the year, but aren’t directly dependent on your sales. The list of expenses shown is typical for a self-employed professional with a home office. You may have additional types of expenses to enter, and of course the amounts you plan to spend will vary. Once your Total Expenses are deducted from your Gross Profit, you’ll see the Net Profit or Loss you’ll be able to take out of the business to pay yourself each month. This is also the amount on which you will pay income tax and self-employment tax each year.
If your estimated net profit is too low, you’ll need to revise your forecast. Don’t make the mistake of thinking your business can be successful anyway, if you just work hard enough. Make the effort to create a P & L forecast every time you launch a new line of business, contemplate a new expense, or consider changing your prices. Your bank balance will reward you for taking the time.