If you are just starting your own business either by yourself, or with other people, then you may not know exactly what to expect in terms of profits. This is because you have not been operating for multiple years, and do not have enough data to help you calculate reasonable profit expectations.
However, being able to estimate profits is extremely important for new business owners. This is because it can help you to figure out whether or not your business will be solvent and successful. Here are some great tips for setting realistic profit expectations for your business.
1. Calculate all of your expenses
It should be possible and relatively straightforward for you to calculate all of the expenses for your business. This can include costs for things like rent, supplies, wages, utilities, etc. All of these things will be subtracted from the gross profits that your company makes. Once the expenses of your business are subtracted from the gross profits, then you will be left with the net profit, which is what you will actually be able to keep. So, calculating all of your business expenses is very important for being able to accurately predict your net profits.
2. Estimate future sales
If you want to know what level of profit your business will generate, then you will need to have some strategy for estimating sales. There are multiple ways to do this. If you are already in operation, then you can view your sales for three months and get the average amount of sales per month by adding up all three figures then dividing this number by three. Then you can multiple the result by whatever period of time you want. If you want to predict your sales for one year, you can multiple it by 12 for example. This can give you a rough estimate of what your sales might be like over the next year.
3. Factor in foreseeable variables
For example, if you have already received purchase orders for a few major sales that are above what you normally bring in, then these should be factored in. Similarly, if the economy has just taken a major downturn and if you anticipate that your business will suffer because of this, then you should factor this in, too. A large downturn in the economy could result in dramatically reduced profits.
4. Know how to calculate profit margins accurately
This may seem overly simple. However, this is something that many people actually get wrong, and it can throw off their profit expectations significantly. For example, many people assume that if they make something for $2 and sell it for $3, then their profit margins are 50 percent for this item. However, this is incorrect. The profit margins for such an item would actually be 33.3 percent. This is because 1 dollar, the actual profit, is 33.3 percent of the total sale, not 50 percent. So, make sure you make profit margin calculations correctly.
5. Factor in taxes
Forgetting to factor in the amount of money that they will owe in taxes is another key mistake that many business owners make when they are setting profit expectations. Failing to accurately account for taxes is something that can really throw off net profit calculations. No matter whether your business is a sole proprietorship, a partnership, an LLC, a C Corp, or an S Corp, you will be taxed on the money that you make with your business. The way that you are taxed and the amount that you are taxed may vary significantly depending on your business structure, but as long as your business generates a significant income, then you will be taxed. So, you need to include tax estimates when you are trying to figure out what your profits will be. Otherwise, your figures could be way off.
6. Don’t ignore key data or information
Many business owners have a tendency to be overly optimistic and to overlook key data or information when they are estimating the profits that they can make. For example, some business owners overlook rising operating costs, increasing competition, or decreasing customer demand. These are all things that you should not do. Ignoring key data or information can definitely make your profit expectations incorrect. So, instead, you need to make sure that you pay close attention to such information and factor it into your profit calculations.
It is good to be optimistic when you are first starting your business because positive energy can help to keep you motivated and focused. However, if you are too optimistic, or if you make other key mistakes such as those mentioned in this article when you are estimating profits, then you could quickly find yourself in trouble. So, for the health of your business, try to avoid making key profit predicting mistakes, in order to generate more realistic numbers. This can help you in the long run.