THE NATIONAL BANK OF NEW ZEALAND
Solution Guide
The benefits of a profit forecast
The profit forecast is the starting point for your financial planning. This guide explains its
elements and how you can use the forecast in your business.
Purpose of the profit forecast
The profit forecast offers you a key financial
planning document. It is:
• An integral part of your business plan,
summarising information from various
parts of your plan (for example, the
number of staff you require will
translate in your profit forecast to a
wages and salary estimate each month).
• A useful tool to help you manage your
financial resources more effectively.
• A planning tool to help you assess your
tax obligations.
• A source of information for your
cashflow forecasts (see the related
Solution Guide ‘The benefits of cashflow
forecasting’).
The profit forecast is also a Budget, because
it allows you to compare your actual sales
and expenses month by month against the
amounts you predicted.
THE NATIONAL BANK OF NEW ZEALAND, PART OF THE ANZ NATIONAL BANK LIMITED
FROM NATIONAL BANK BUSINESS BANKING
June 2004
Three versions of the future
In the course of preparing your annual
financial statements, one of the key
documents the accountant will produce is a
Profit and Loss statement. This document is
historical: it tells you how well your
business did last year (see the Solution Guide,
‘Understanding your Profit and Loss
statement’.) By contrast, the profit forecast
is predictive: it looks at the future and
what might happen, rather than what has
happened.
For this reason, many business people
produce three different versions of the
profit and loss forecast:
• An optimistic version: what you hope
will happen.
• A pessimistic version that factors in
the things that could go wrong (lower
sales, higher costs).
• A realistic version: your best estimate
of the future.
Your lenders will find these different
versions more helpful than just a realistic
‘best estimate’ version because it shows
them that you have thought about
alternatives. They will also be interested to
see if your business can remain viable (and
therefore their funds secure) even in the
pessimistic version. The pessimistic version
will also help you to plan for things not
turning out as well as expected.
Figures should exclude GST
Note that all figures in the profit forecast
should exclude GST. This is because the
GST component has nothing to do with the
profitability of your business: it is simply a
tax which you pay to the government. The
Solution Guide ‘GST made simple’ explains
this in more detail.
Elements of the profit forecast
The profit forecast runs over 12 months
and has four parts (your Business Plus or
Focus CD-ROM provides a profit forecast
that provides automatically calculated
totals):
1. Your Sales income. In this section you
forecast all the expected revenue (cash
sales, credit sales, etc).
2. Direct costs of these sales (raw
materials, stock and wages directly
connected with production). The
THE NATIONAL BANK OF NEW ZEALAND, PART OF THE ANZ NATIONAL BANK LIMITED
difference between (1) and (2) becomes
your forecast Gross profit.
3. Now you forecast your Business
overheads (that is, the fixed costs of
running your business irrespective of
your level of sales). Subtracting the
Total Overheads from your Gross
Profit gives you the Operating profit.
4. In the last section you subtract a few
more variable items such as a provision
for bad debts and depreciation to give
you a Net profit before tax. The
spreadsheet automatically calculates the
Tax on this net profit to give the final
Net profit after tax.
So where do you get the figures from?
• If you have run your business for
several years, then you can input the
figures from those of previous years,
making any appropriate adjustments for
inflation/deflation or expected increases
or downturns in sales, number of staff
employed, etc.
• If you are starting up a new business,
then the profit forecast will form part of
your business plan, and you will derive
the figures from the various elements of
your plan, your market research, and
consultation with your accountant. For
example, in your business plan you will
state the number of employees your
business requires. This number will
translate in the profit forecast into an
 estimate of the monthly staff wages and
salaries.
How does a profit forecast
differ from a cashflow
forecast?
Both profit forecasts and cashflow forecasts
are valuable tools to help you manage your
business. Ask your Business Banking
Manager for the related Solution Guide ‘The
benefits of cashflow forecasting’. Reading
this related guide will help make you aware
you’re only concerned with the actual
cash that you think will pass through
your business and be shown in your
bank statement month by month.
Key figures that the Profit Forecast reveals
include:
• Your likely taxable income.
• Your tax liability as a result of this
income.
• The break-even point for your business.
The cashflow forecast

of the main purposes and differences in the The key purpose of the cashflow forecast
two documents. These can be clarified as is to help you work out the net cash surplus
follows: (or shortfall) you will have available each
month, (or will need each month) to pay
The profit forecast
your commitments and make purchases.
The profit forecast is designed to help you
The cashflow forecast deals with all the cash
assess the future profitability of your
that you expect to physically receive in
business. In contrast to the cashflow
the business or pay out. On the Income
forecast, the profit forecast:
side, for example, in addition to sales
• Deals only with business income (when income, this could include:
earned but not necessarily received and
• Capital income (sale of fixed assets, such
not with items such as capital
as cars or equipment).
introduced).
• Capital introduced (such as new capital
• Deals only with business expenses.
introduced into the business by the
• Is accrual based not cash based like
owner or shareholders).
the cashflow forecast (in other words,
• Loans introduced into the business.
the profit forecast includes credit sales
You wouldn’t include any of these three
- work that you’ve invoiced, but not yet
items in your profit forecast because they
received the money for and also
have nothing directly to do with the actual
expenses you’ve incurred, but not yet
trading profitability of your business.
paid for). In the cashflow forecast

THE NATIONAL BANK OF NEW ZEALAND, PART OF THE ANZ NATIONAL BANK LIMITED
 Summary Resources

Another way of expressing the difference Other relevant Solution Guides include:
between the two forecasts is this: in a profit
‘Five steps to make sure you get paid’
forecast, you’re attempting to predict the
‘GST made simple’
future profitability of your business. In a
‘How to collect debts’
cashflow forecast you’re trying to predict ‘Pricing strategy made easy’
what your bank statement will look like
‘Should I own or lease?
at the end of each month (in other words
‘Tax made simple’
the cash shortfall or surplus each month).
‘The benefits of cashflow forecasting’
The profit forecast is therefore your prime ‘Tips to improve your cashflow’
tool for helping you predict the amount of
‘Understanding working capital’
money you’re likely to earn and therefore
‘Understanding your Balance Sheet’
the amount of tax you’re likely to have to
‘Understanding your Profit and Loss
pay.
statement’

Further information:

To talk to someone about your business banking needs call 0800 16 88 88 and we will put you in
touch with the Business Banking Manager nearest you or visit www.nationalbank.co.nz/business

DISCLAIMER: THIS MATERIAL IS PROVIDED AS A COMPLIMENTARY SERVICE OF THE NATIONAL BANK OF NEW ZEALAND, PART OF ANZ
NATIONAL BANK LIMITED ("BANK"). IT IS PREPARED BASED ON INFORMATION AND SOURCES THE BANK BELIEVES TO BE RELIABLE. ITS
CONTENT IS FOR INFORMATION ONLY, IS SUBJECT TO CHANGE AND IS NOT A SUBSTITUTE FOR COMMERCIAL JUDGEMENT OR
PROFESSIONAL ADVICE, WHICH SHOULD BE SOUGHT PRIOR TO ACTING IN RELIANCE ON IT. TO THE EXTENT PERMITTED BY LAW THE
BANK DISCLAIMS LIABILITY OR RESPONSIBILITY TO ANY PERSON FOR ANY DIRECT OR INDIRECT LOSS OR DAMAGE THAT MAY RESULT
FROM ANY ACT OR OMISSION BY ANY PERSON IN RELATION TO THE MATERIAL.
THE NATIONAL BANK OF NEW ZEALAND, PART OF THE ANZ NATIONAL BANK LIMITED
 2004 THE NATIONAL BANK OF NEW ZEALAND, PART OF ANZ NATIONAL BANK LIMITED. ALL RIGHTS RESERVED.