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How to Forecast Your Annual Profits - Fleximize

How to Forecast Your Annual Profits

Get advice on forecasting profit for the next year.

By Kate Josselyn

What is a profit forecast?

A profit forecast is a financial estimate of how much money your business expects to make – or lose – over a set time period, usually a year. It’s based on past performance, current trends, and your future plans. A clear profit forecast helps you make informed decisions and stay in control of your business’ financial health.

Profit forecasts also tie into your broader financial strategy, including your business plan, budget, and cash flow statements. Whether you’re applying for funding, launching a new product, or reviewing your operational spend, a solid profit forecast ensures you’re taking an informed approach based on real-world insights and data.

Why profit forecasting matters

Profit forecasting goes beyond predicting profit, it’s about understanding:

They’re an essential part of your business plan and are often required by investors or lenders. They also support your cash flow forecast and income statement, ensuring you stay in control of your finances.

Most importantly, your profit forecast offers a snapshot of your long-term financial health. It shows whether you’re on track for growth, breakeven, or decline, and helps you assess whether your goals are achievable under current market conditions.

Cash or accrual basis?

You can forecast profit on a cash basis or an accrual basis.

A cash basis forecast tracks the actual money entering and leaving your bank account. This approach is useful for smaller businesses with tight cash flow or limited reserves.

An accrual basis forecast, however, considers income and expenses when they are earned or incurred, not when money changes hands. This gives a more accurate picture of long-term financial health, especially when invoices or credit terms are involved. Most financial forecasts, including profit and loss forecasts, use the accrual method.

Ideally, you should forecast profits at least three years ahead. Update and revise your forecasts quarterly to keep them aligned with current market conditions and business performance. If your forecast is part of a broader P&L forecast or cash flow forecast, make sure the assumptions used across each remain consistent.

How to forecast your annual profits

Step 1: Review past data

Start by looking at your income and outgoings over the last full year. Use your income statement or profit and loss account to get a detailed view of your past financial performance.

Remove any one-off or unusual transactions, like a temporary government grant or emergency equipment replacement. If you have multiple years of accounts, use them to calculate averages and spot trends. This helps create a more realistic picture of future revenue and expenses.

If your business is new or you don’t have access to historical data, look for industry benchmarks or financials from similar businesses. You can also consult an accountant or business advisor to estimate the likely costs of producing your products or services.

Step 2: List your costs

Next, create a detailed breakdown of your costs. Start with your fixed costs, also known as overheads. These are ongoing expenses that don’t change much, such as:

Then identify your variable or project-based costs. These fluctuate depending on your business activity and might include:

Don’t forget to include hidden or occasional costs, such as maintenance, training, or bad debt provisions. Categorising your costs helps you understand which areas are flexible and where you can cut back if needed. It also highlights how much income you need to cover essential outgoings.

Step 3: Estimate your income

Now estimate your future income. Use a combination of recent sales trends, seasonal patterns, customer behaviour, and expected market conditions. Consider whether you’ll be launching new products or services, entering new markets, or changing pricing.

Try to answer:

This stage often involves going back to your expenditure and adjusting your operational costs to match realistic sales expectations.

Step 4: Work out profit

Subtract your total projected expenses from your total projected income. This gives you your profit or loss forecast, also referred to as your P&L forecast.

If the result is a positive figure, congratulations – you’re forecasting a net profit. If the number is negative, your business may face a loss unless changes are made. Either way, your forecast gives you time to adjust your strategy.

You now have a baseline profit forecast to support:

At this stage, you should have:

Step 5: Plan for different outcomes

Forecasting isn’t a one-size-fits-all approach. Large companies often produce multiple forecasts based on best-case, worst-case, and most likely scenarios. This lets them prepare for a range of market conditions and make more informed decisions.

If you’re short on time, aim for a middle-ground forecast that’s neither overly optimistic nor overly conservative. This balanced approach accounts for potential setbacks while still allowing for growth.

Scenario planning helps you:

Step 6: Factor in external risks

Consider wider factors that could affect your profits:

These may be beyond your control, but building assumptions around them makes your financial forecasts more robust. For example, if you anticipate a rise in raw material costs, reflect this in your cost of goods sold projection.

Step 7: Revisit and update regularly

Your forecast is a living document. Review it quarterly, or sooner if your business circumstances change significantly. Regular reviews help you:

This habit not only helps you stay agile but also gives you more credibility with stakeholders and investors.

Step 8: Link your profit forecast with other financial tools

A profit forecast works best alongside other tools, such as:

Together, these tools give a fuller picture of your business’s financial health and allow you to make well-rounded, informed decisions.

You can build your own forecast in a spreadsheet or use accounting software with built-in forecasting tools. Many platforms offer templates for income statements, P&L forecasts, and cash flow forecasts. Choose what fits your business size and complexity.

Forecasting is a smart habit for any growing business. Build it into your regular planning and use it to steer decisions with confidence. The more realistic and regularly updated your forecasts, the better equipped you’ll be to handle challenges and spot new opportunities to grow sustainably.

Your common questions answered

A profit forecast is a financial estimate of your business’s future profit or loss based on projected income and expenses.

Forecast profit by reviewing past income and costs, projecting future revenue, breaking down expenses, and adjusting for market trends and risks.

Profit forecasting helps you make informed decisions, manage resources, attract investment, and maintain financial stability.

A profit forecast estimates your profitability, while a cash flow forecast focuses on when cash enters or leaves your business.

Review and update your profit forecast at least quarterly, or whenever there are major changes in your business or market.

Not exactly. A profit forecast projects future figures, while an income statement (also called a profit and loss statement) reports historical financial performance. Both are vital for making informed business decisions.

Absolutely. A robust forecast can guide hiring, marketing, investment, and scaling decisions, helping your business stay competitive and financially stable in the long run.

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