Why create profit and loss projections
Profit and loss projections allow you to analyze your profit (or loss) over a designated period of time in the future. This analysis shows stakeholders how much you expect to make each month, for a predetermined amount of time. The profit and loss report, along with the cash flow statement, and the balance sheet are the three essential financial reports banks will be looking for. For new companies, a break even analysis is also valuable.
For both the start-up, or the ongoing operation, financial projections help businesses to grow. Financial plans allow you to see when you might expect to break even, what your profit may be, and when you can expect to have the cash in the bank from those profits to pay for expenses. They help you set financial and operational goals like hiring new people, and are a good resource in obtaining financing for your business.
The profit and loss statement, also known as the income statement, provides helpful information about the financial health of a company. It outlines revenues, expenses, and profits, as well as associated profit margins. These margins allow for comparisons against other companies in the industry, as well as self evaluation. That is, evaluating a company’s progress against itself over time.
Stakeholders such as investors also like to see projected income statements. These projections provide investors with the financial impact of your company’s business plan, and its business plan over time. Your company’s projected income statement also helps prospective investors assess if the growth potential warrants investment. However, lenders are generally most concerned about continuity of profits. By using a projected P&L to show how a bank loan will help your company achieve consistent revenue, and profits, you can increase your likelihood of obtaining a loan.
Report formats
Decide your method of analysis. Are you going to use a software like LivePlan, or will you prepare these in your spreadsheet. For beginners, using software will come in handy particularly in creating the analysis of cash flow, but also your balance sheet.
What steps are needed in creating profit and loss projections
- First, create a monthly list of all your revenue sources over the upcoming 3 to 5 years. I’d recommend completing your revenue build up by looking at a sum of the individual services (including the individual breakdown). For example, how many hours of 9151, 97152 are you using per assessment. For adaptive behavior treatment codes, how many hours or units of 97153 are you providing or planning to provide to clients on a monthly basis. What percentage of that is direction of technician, 97155, and therefore how many hours for that same period of time as 97153. How many hours of caregiver training do you want to provide per month per client in your model? Are you going to provide other services such as 97154, 97157 or 97158? If so, include that in your modeling as well. Then for each service item, what is the rate by which you multiply that number of hours per month. Then list the total expected revenue per service item and in total. Providing a breakdown by service line provides a clearer picture to banks and other stakeholders of how you come to the revenue you did. A revenue build, or a sales forecast, is an important part of the complete analysis.
- Second, create a list of all your expenses for the upcoming same period of time. Start with your direct costs; that is, the employee costs associated with the procurement of services. Separating out this allows for the analysis of gross margins, that is, sales revenue minus costs of goods sold. This is a helpful metric to have in business and PBH is working to help identify benchmarks for these metrics among its clients.
- Next, consider all other costs associated with being open for services. Consider upfront start up costs such as a clinic remodel, and ongoing expenses. Pro tip. It helps to have a list of vendors and expenses from prior months to calibrate the projections. See Top 80 expenses to consider when starting or running an Applied Behavior Analysis (ABA) company.
- Look at your gross profit. Gross profit is calculated by subtracting cost of generating the services from overall sales. So, if someone charges 100 dollars per hour for a service, for one hour, and the person and related expenses are 40 dollars per hour, then the gross profit for that hour is 60 dollars per hour. Gross profit only includes variable and direct costs, not fixed costs. Gross profit assesses a company’s efficiency in using labor in generating its services. This metric lets you see how much you keep on the dollar after accounting for the cost of generating the service/revenue.
- Calculate gross profit margins. To do this, divide cost of generating the service by the total revenue. In the above example, you would divide 40 by 100, so gross profit margins would be 40% in this case. Monitor this metric overtime to evaluate your efficiency with labor costs over time.
- Look at your overall net profit (or loss) by month and by year for that same period of time and adjust the numbers, in a realistic manner, to achieve desired profit over time. That is, revenue minus all expenses. As a business owner or senior level manager, you will need to be familiar with the net profit margins.
- Calculate net profit margins. To do this, divide net profit by revenue. This measure will report profit as a percentage of revenue.
Remember, a major focus of this exercise is to make sure you turn a profit while delivering quality services. Doing so will enable you to provide consistent and ongoing services to the people you serve. Hone your numbers. How can you increase your revenue? How can you reduce expenses over time? This exercise will help you run a profitable operation.
Partners Behavioral Health (PBH) can help with these financial analyses and projections, as well as much more. See our services page for more details. https://partnersaba.com/services1. Contact us at info@partnersaba.com with any questions or to obtain our professional services.
