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P&L FORECASTING

P&L Forecasting

PROFIT & LOSS account Sales- Costs of goods sold= Gross margin- Operating Expenses= EBITDA- Depreciation= EBIT- Interest= EBT- Taxes= Net Profit

Let’s go step by step, starting with the first line: sales.

Sales growth is the most important hypothesis in your forecasting duties: it will influence any other figure in the forecast. So you will surely want to run sensitivity tests once you have finished forecasting a basic scenario. My first recommendation: make the growth parameter explicit in your Excel sheet.

PROFIT & LOSS account Sales- Costs of goods sold= Gross margin- Operating Expenses= EBITDA- Depreciation= EBIT- Interest= EBT- Taxes= Net Profit

Gross Margin

You can either calculate c.g.s. or gross margin as a percentage of sales. Use historical margins as a reference.

Will the margin improve? Be careful, it is not easy to improve gross margin if you are pushing sales growth at the same time.

P&L Forecasting

PROFIT & LOSS account Sales- Costs of goods sold= Gross margin- Operating Expenses= EBITDA- Depreciation= EBIT- Interest= EBT- Taxes= Net Profit

Estimating OPEX is not easy. As you learned in Block 3, some expenses are variable and some are fixed (at least in the short term). The business may have economies of scale.The simplest way to calculate OPEX is to consider all expenses as variable, so they will grow with sales and at the same rate. This is usually a fair assumption.If you have enough information, you will possibly make a better hypothesis.

P&L Forecasting

Operating expenses

PROFIT & LOSS account Sales- Costs of goods sold= Gross margin- Operating Expenses= EBITDA- Depreciation= EBIT- Interest= EBT- Taxes= Net Profit

Depreciation is not very important in our calculations. Use the same depreciation as in the previous year, unless the firm is making heavy investments.

P&L Forecasting

Depreciation

PROFIT & LOSS account Sales- Costs of goods sold= Gross margin- Operating Expenses= EBITDA- Depreciation= EBIT- Interest= EBT- Taxes= Net Profit

To calculate interest expenses in a year you need to know the debt. But the amount of debt needed in a period is part of the calculations we need to perform, and to estimate it we need to know the net profit. So, we are caught in a circle of calculations. As a first estimation, use interest over the amount of debt at the end of the previous year. You can review this later, if necessary.

P&L Forecasting

Interest expenses

PROFIT & LOSS account Sales- Costs of goods sold= Gross margin- Operating Expenses= EBITDA- Depreciation= EBIT- Interest= EBT- Taxes= Net Profit

All right, now we have a first forecast of net profit at the end of the period.Clearly, you are aware that this is really a gross estimation and you will probably feel uncertain about the figure. Don’t worry, follow up with balance sheet forecasting using this first estimation. You can apply sensitivity tests later.

P&L Forecasting

Net profit

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