E-Learning course: Accounting & Finance

1. ©InstitutoInternacionalSanTelmo,2012
P&L FORECASTING
E-LEARNING COURSE: ACCOUNTING & FINANCES

2. 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.

3. 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

4. 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

5. 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

6. 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

7. 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

8. ©InstitutoInternacionalSanTelmo,2012