Expense Management Plan Building is not intended to be a detailed financial statement. It is to act as a guide to help you forecast your company's sales and expenses. The categories within an Expense Management projection work sheet are arbitrary and should be changed to reflect your company's operations.
After you've completed this projection, you may wish to create a more detailed P&L projection that reflects your business's sales and expenses on a monthly or quarterly basis.
Here are some suggestions to creating an Expense Management projection:
Forecast sales: During the course of the next year, what are the lowest sales figures you could expect? What are the highest? Break down your sales assumptions by product (or service) lines, starting with the worst-case scenario. The product/service lines are placeholders where you can insert products or services that reflect your business's operations. The goal here is to get a handle on the worst possible situation. Then project sales under the best possible conditions, with all of your sales efforts succeeding and customers flocking to your door.
Once you've forecasted sales, record a forecast for the cost of goods sold. Use the categories you've assigned to the sales forecast here, as well.
Forecast expenses: Identify all of the business expenses that you'll incur to generate revenue under both the low and high sales projections you've made. Unless your company is a start-up, you should review past operating statement and business records to derive this information.
Costs that, whatever your sales level, are present and remain fairly constant should be entered as fixed expenses. They may include such expenses as rent/mortgage payments, certain taxes, leased equipment payments, and basic telephone and utilities expenses. A business expenses that increases and decreases with production is considered variable expenses and should be labeled as such. They may include cost of goods sold, cost of sales, advertising, labor, and variable utilities.
Fixed expenses will most likely remain the same for best- and worst-case situations. When projecting variable expenses, many expenses will remain a constant percentage of sales, but some will not. Payroll and payroll taxes may fluctuate as new hires are brought on to keep up with demand. Or advertising expenses may increase if you try to take over more market share. If you're confused whether an expense is fixed or variable, try considering it a fixed expense; that will force you to create a conservative forecast.
Compare and review "best" and "worst": Now that you've recorded both scenarios, create a "most likely" scenario by comparing the two. With this method, you will produce a more realistic forecast upon which you can make decisions.
Look at your profit level: Now total your scenarios to discover your profit before depreciation. You will have three potential profit figures: one low, one high, and one that is most likely.
Next, calculate the depreciation of your fixed assets. (Depreciation involves the amortization of the cost of fixed assets over time. Check with your accountant for more details.)
Now discover your net profit before income taxes. Subtract "depreciation" from "profit before depreciation and income taxes" to arrive at your net profit before income taxes
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