business plan profitability analysis

How to conduct a profitability analysis for your business

A profitability analysis is a critical tool that allows business owners to review their financial performance and compare it to that of the organization's peers.

Using a profitability analysis, you can deduce your company's efficiencies and determine where improvements are needed. In this article, we'll dive into profitability analysis, what financial metrics they unearth, and how to conduct one in five steps.

What is a profitability analysis?

A profitability analysis uses several financial ratios to evaluate a company’s ability to generate a profit.

Financial planning and analysis ( FP&A ) managers assess various aspects of the income statement and balance sheet , including revenue, expenses, assets, and shareholder equity, to benchmark a company’s performance. Managers can compare results from a profitability analysis over different periods or against other businesses in the same market sector for additional data and better decision-making.

Why conduct a profitability analysis?

Business owners may feel content in the knowledge that they're making a profit. However, failing to dive into performance details is a mistake. A profitability analysis allows finance teams to uncover both the efficiencies and inefficiencies of their business operations. Using the knowledge gained from their analysis, managers can adjust their financial management strategies to tap into the potential for future revenue growth and earnings.

Profitability ratios for measuring profit

Gross profit margin and net profit margin ratios are the most commonly used ratios for measuring profitability. Gross profit margin reflects the percentage of your profits left over after factoring in the cost of goods, while net profit margin measures your net profitability after factoring in expenses, interest, and taxes.

You can also include metrics like operational profit margin, margin per user, and cash flow margin in a profitability analysis for a more complete picture of your profitability.

Gross profit margin

The gross profit margin provides finance teams with the percentage of profits after considering the cost of goods sold (COGS). The formula for your gross profit margin is:

((Total revenue - COGS) / (Total revenue)) x 100 = Gross profit margin

In most cases, the gross profit margin should remain flat from one quarter to the next unless the organization alters its methods for creating its products.

Net profit margin

The net profit margin calculates the company's net profitability after considering all expenses, including interest and taxes. Calculate your net profit margin using the following formula:

(Net income / Sales revenue) x 100 = Net profit margin

Finance teams can improve their net profit margin by cutting expenses or growing their revenue.

Operating profit margin

The operating profit margin measures earnings before interest and taxes (EBIT). It's different from the gross profit margin since it considers all operating costs and administrative expenses, not only COGS. To calculate the operating profit margin, use the below formula:

(Operating profit / Total sales) x 100 = Operating profit margin

The operating profit margin reflects total profits before interest and taxes.

Margin per user

Margin per user calculates the company's profits per customer. This metric is useful for organizations that follow a subscriber-based business model but may also be appropriate for other sales models. To determine the margin per user, apply the following formula:

((Total revenue - Operating expenses) / Users for period) = Margin per user

Finance teams can further analyze the margin per user by dividing the months included in the financial statements.

Cash flow margin

Cash flow margin calculates how much income, or cash, a business is generating from its operating activities. In other words, it’s a measure of how well a company translates sales into cash. The formula for calculating cash flow margin is:

(Net cash from operating activities / Net sales) x 100 = Cash Flow Margin

A higher cash flow margin suggests a more efficient business, since a greater proportion of its sales are converted into cash.

Revenue ratios

Profit is the amount of cash remaining after accounting for all of your business expenses. Revenue, on the other hand, is the total amount of income generated without accounting for expenses.

In addition to profitability ratios, your business may want to include revenue ratios in its financial reports. Here are the two types of revenue ratios and their calculations:

Return on assets

Return on assets (ROA) refers to the profit generated from a company’s total assets. It compares profit or net income generated from the assets against any cash invested into the company. The return on assets ratio measures how efficiently a company is using its funding.

The formula for calculating return on assets is:

(Net income / Total assets) x 100 = ROA

In general, the higher the ROA, the better.

Return on equity

Return on equity (ROE) refers to the amount of returns a company can provide its shareholders. It’s an indicator of how efficiently a company manages its capital invested by shareholders and how much value it’s able to create using it.

The formula for calculating return on equity is:

(Net Income / Shareholders' Equity) = ROE

Investors tend to prefer companies with a higher ROE, as it signifies better financial health and higher returns on their investments.

How to complete a profitability analysis in five steps

Here’s how to complete a profitability analysis step-by-step, including the most commonly used profitability ratios:

1. Gather financial statements

To calculate the appropriate metrics for your profitability analysis, you'll need the profit-and-loss (P&L) statement and balance sheet for your own company and those of a competitor for the same period. Below are sample financial details of two hypothetical companies for the year:

2. Calculate the profitability metrics for each company

Using the financial details given in step one, we'll conduct a profitability analysis for both companies.

(($1M total revenue - $800K COGS) / ($1M total revenue)) x 100 = 20% gross profit margin

(($1.25M total revenue - $950K COGS) / ($1.25M total revenue)) x 100 = 24% gross profit margin

($100K operating profit / $1M total sales) x 100 = 10% operating profit margin

($200K operating profit / $1.25 M total sales) x 100 = 16% operating profit margin

($50K net income / $1M sales revenue) x 100 = 5% net profit margin

($100K net income / $1.25M sales revenue) x 100 = 8% net profit margin

(($1M total revenue - $900K total expenses) / 10K users for period) = $10 margin per user

(($1.25M total revenue - $1.05M total expenses) / 12K users for period) = $16.67 margin per user

($50K net income / $500K total assets) x 100 = 10% return on assets

($100K net income / $750K total assets) x 100 = 13.3% return on assets

3. Compare the results

Next, prepare a spreadsheet detailing the results of the profitability analysis:

In this example, the results show that Company B has better profitability across all measurements.

4. Determine the drivers for differences

You'll need to determine the reasons for the differences in profitability between both companies. Using each measurement, consider the underlying factors to determine why Company B is performing better than Company A.

As an example, the gross profit margin for Company B surpasses Company A's. Company B's revenue is higher, but its COGS is less as a percentage of its revenue than it is for Company A. Company B seems to have found a cheaper way to produce products than Company A.

The financial statements for both companies show the same operating expenses, even though Company B generated more revenue and has a larger user base. In this case, Company A should take a detailed look into its operating expenses to see if it’s spending too much on overhead and administrative costs.

5. Take action

Completing a profitability analysis is fruitless if management doesn't make changes. The results from the profitability analysis provide your FP&A team with an opportunity to adjust your operating model to improve future earnings.

Other types of financial modeling

Profitability analyses aren’t perfect. They only consider past information, which quickly becomes outdated as your company continues to grow.

A profitability analysis also doesn't account for risk. Sometimes, companies take on a significant risk that isn't likely to immediately pay off. In this instance, they may have a higher potential for profits in future years.

You can get a more complete picture of your company’s financials by including other financial models, like a break-even analysis and valuation models, in your budgeting process. Financial forecasting can also help you determine your future profitability, instead of merely looking at your current bottom line.

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Planning, Startups, Stories

Tim berry on business planning, starting and growing your business, and having a life in the meantime., standard business plan financials: projected profit and loss.

Continuing with my series here on standard business plan financials, all taken from my Lean Business Planning site, the Profit and Loss, also called Income Statement, is probably the most standard of all financial statements. And the projected profit and loss, or projected income (or pro-forma profit and loss or pro-forma income) is also the most standard of the financial projections in a business plan.

• It starts with Sales, which is why business people who like buzzwords will sometimes refer to sales as “the top line.”
• It then shows Direct Costs (or COGS, or Unit Costs).
• Then Gross Margin, Sales less Direct Costs.
• Then operating expenses.
• Gross margin less operating expenses is gross profit, also called EBITDA for “earnings before interest, taxes, depreciation and amortization.” I use EBITDA instead of the more traditional EBIT (earnings before interest and taxes). I explained that choice and depreciation and amortization as well in Financial Projection Tips and Traps , in the previous section.
• Then it shows depreciation, interest expenses, and then taxes…
• Then, at the very bottom, Net Profit; this is why so many people refer to net profit as “the bottom line,” which has also come to mean the conclusion, or main point, in a discussion.

The following illustration shows a simple Projected Profit and Loss for the bicycle store I’ve been using as an example. This example doesn’t divide operating expenses into categories. The format and math start with sales at the top. You’ll find that same basic layout in everything from small business accounting statements to the financial disclosures of large enterprises whose stock is traded on public markets. Companies vary widely on how much detail they include. And projections are always different from statements, because of Planning not accounting . But still this is standard.

A lean business plan will normally include sales, costs of sales, and expenses. To take it from there to a more formal projected Profit and Loss is a matter of collecting forecasts from the lean plan. The sales and costs of sales go at the top, then operating expenses. Calculating net profit is simple math.

Keep your assumptions simple. Remember our principle about planning and accounting. Don’t try to calculate interest based on a complex series of debt instruments; just average your interest over the projected debt. Don’t try to do graduated tax rates; use an average tax percentage for a profitable company.

Notice that the Profit and Loss involves only four of the Six Key Financial Terms . While a Profit and Loss Statement or Projected Profit and Loss affects the Balance Sheet because earnings are part of capital, it includes only sales, costs, expenses, and profit.

Hi, In case of bank financing for machineries and working capital, how can it be broken down in to the expense stream? ( capital + interest)

When you spend on assets is not deductible from income, and is therefore not an expense. What you spent to repay the principle of a loan is not deductible, and therefore not an expense. The interest on a loan is deductible, and is an expense.

Excuse me, may I know if the project profit & loss should plan for the first year only or for year 1-3 in business plan of a new company?

Kattie Wan, I recommend for normal cases the projected profit and loss monthly for the first 12 months, and two years annually after that. There are always special cases, though; every business is different.

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How to Write the Financial Section of a Business Plan

An outline of your company's growth strategy is essential to a business plan, but it just isn't complete without the numbers to back it up. here's some advice on how to include things like a sales forecast, expense budget, and cash-flow statement..

A business plan is all conceptual until you start filling in the numbers and terms. The sections about your marketing plan and strategy are interesting to read, but they don't mean a thing if you can't justify your business with good figures on the bottom line. You do this in a distinct section of your business plan for financial forecasts and statements. The financial section of a business plan is one of the most essential components of the plan, as you will need it if you have any hope of winning over investors or obtaining a bank loan. Even if you don't need financing, you should compile a financial forecast in order to simply be successful in steering your business. "This is what will tell you whether the business will be viable or whether you are wasting your time and/or money," says Linda Pinson, author of Automate Your Business Plan for Windows  (Out of Your Mind 2008) and Anatomy of a Business Plan (Out of Your Mind 2008), who runs a publishing and software business Out of Your Mind and Into the Marketplace . "In many instances, it will tell you that you should not be going into this business." The following will cover what the financial section of a business plan is, what it should include, and how you should use it to not only win financing but to better manage your business.

Dig Deeper: Generating an Accurate Sales Forecast

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How to Write the Financial Section of a Business Plan: The Purpose of the Financial Section Let's start by explaining what the financial section of a business plan is not. Realize that the financial section is not the same as accounting. Many people get confused about this because the financial projections that you include--profit and loss, balance sheet, and cash flow--look similar to accounting statements your business generates. But accounting looks back in time, starting today and taking a historical view. Business planning or forecasting is a forward-looking view, starting today and going into the future. "You don't do financials in a business plan the same way you calculate the details in your accounting reports," says Tim Berry, president and founder of Palo Alto Software, who blogs at Bplans.com and is writing a book, The Plan-As-You-Go Business Plan. "It's not tax reporting. It's an elaborate educated guess." What this means, says Berry, is that you summarize and aggregate more than you might with accounting, which deals more in detail. "You don't have to imagine all future asset purchases with hypothetical dates and hypothetical depreciation schedules to estimate future depreciation," he says. "You can just guess based on past results. And you don't spend a lot of time on minute details in a financial forecast that depends on an educated guess for sales." The purpose of the financial section of a business plan is two-fold. You're going to need it if you are seeking investment from venture capitalists, angel investors, or even smart family members. They are going to want to see numbers that say your business will grow--and quickly--and that there is an exit strategy for them on the horizon, during which they can make a profit. Any bank or lender will also ask to see these numbers as well to make sure you can repay your loan. But the most important reason to compile this financial forecast is for your own benefit, so you understand how you project your business will do. "This is an ongoing, living document. It should be a guide to running your business," Pinson says. "And at any particular time you feel you need funding or financing, then you are prepared to go with your documents." If there is a rule of thumb when filling in the numbers in the financial section of your business plan, it's this: Be realistic. "There is a tremendous problem with the hockey-stick forecast" that projects growth as steady until it shoots up like the end of a hockey stick, Berry says. "They really aren't credible." Berry, who acts as an angel investor with the Willamette Angel Conference, says that while a startling growth trajectory is something that would-be investors would love to see, it's most often not a believable growth forecast. "Everyone wants to get involved in the next Google or Twitter, but every plan seems to have this hockey stick forecast," he says. "Sales are going along flat, but six months from now there is a huge turn and everything gets amazing, assuming they get the investors' money."  The way you come up a credible financial section for your business plan is to demonstrate that it's realistic. One way, Berry says, is to break the figures into components, by sales channel or target market segment, and provide realistic estimates for sales and revenue. "It's not exactly data, because you're still guessing the future. But if you break the guess into component guesses and look at each one individually, it somehow feels better," Berry says. "Nobody wins by overly optimistic or overly pessimistic forecasts."

Dig Deeper: What Angel Investors Look For

How to Write the Financial Section of a Business Plan: The Components of a Financial Section

A financial forecast isn't necessarily compiled in sequence. And you most likely won't present it in the final document in the same sequence you compile the figures and documents. Berry says that it's typical to start in one place and jump back and forth. For example, what you see in the cash-flow plan might mean going back to change estimates for sales and expenses.  Still, he says that it's easier to explain in sequence, as long as you understand that you don't start at step one and go to step six without looking back--a lot--in between.

• Start with a sales forecast. Set up a spreadsheet projecting your sales over the course of three years. Set up different sections for different lines of sales and columns for every month for the first year and either on a monthly or quarterly basis for the second and third years. "Ideally you want to project in spreadsheet blocks that include one block for unit sales, one block for pricing, a third block that multiplies units times price to calculate sales, a fourth block that has unit costs, and a fifth that multiplies units times unit cost to calculate cost of sales (also called COGS or direct costs)," Berry says. "Why do you want cost of sales in a sales forecast? Because you want to calculate gross margin. Gross margin is sales less cost of sales, and it's a useful number for comparing with different standard industry ratios." If it's a new product or a new line of business, you have to make an educated guess. The best way to do that, Berry says, is to look at past results.
• Create an expenses budget. You're going to need to understand how much it's going to cost you to actually make the sales you have forecast. Berry likes to differentiate between fixed costs (i.e., rent and payroll) and variable costs (i.e., most advertising and promotional expenses), because it's a good thing for a business to know. "Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign," Berry says. "Most of your variable costs are in those direct costs that belong in your sales forecast, but there are also some variable expenses, like ads and rebates and such." Once again, this is a forecast, not accounting, and you're going to have to estimate things like interest and taxes. Berry recommends you go with simple math. He says multiply estimated profits times your best-guess tax percentage rate to estimate taxes. And then multiply your estimated debts balance times an estimated interest rate to estimate interest.
• Develop a cash-flow statement. This is the statement that shows physical dollars moving in and out of the business. "Cash flow is king," Pinson says. You base this partly on your sales forecasts, balance sheet items, and other assumptions. If you are operating an existing business, you should have historical documents, such as profit and loss statements and balance sheets from years past to base these forecasts on. If you are starting a new business and do not have these historical financial statements, you start by projecting a cash-flow statement broken down into 12 months. Pinson says that it's important to understand when compiling this cash-flow projection that you need to choose a realistic ratio for how many of your invoices will be paid in cash, 30 days, 60 days, 90 days and so on. You don't want to be surprised that you only collect 80 percent of your invoices in the first 30 days when you are counting on 100 percent to pay your expenses, she says. Some business planning software programs will have these formulas built in to help you make these projections.
• Income projections. This is your pro forma profit and loss statement, detailing forecasts for your business for the coming three years. Use the numbers that you put in your sales forecast, expense projections, and cash flow statement. "Sales, lest cost of sales, is gross margin," Berry says. "Gross margin, less expenses, interest, and taxes, is net profit."
• Deal with assets and liabilities. You also need a projected balance sheet. You have to deal with assets and liabilities that aren't in the profits and loss statement and project the net worth of your business at the end of the fiscal year. Some of those are obvious and affect you at only the beginning, like startup assets. A lot are not obvious. "Interest is in the profit and loss, but repayment of principle isn't," Berry says. "Taking out a loan, giving out a loan, and inventory show up only in assets--until you pay for them." So the way to compile this is to start with assets, and estimate what you'll have on hand, month by month for cash, accounts receivable (money owed to you), inventory if you have it, and substantial assets like land, buildings, and equipment. Then figure out what you have as liabilities--meaning debts. That's money you owe because you haven't paid bills (which is called accounts payable) and the debts you have because of outstanding loans.
• Breakeven analysis. The breakeven point, Pinson says, is when your business's expenses match your sales or service volume. The three-year income projection will enable you to undertake this analysis. "If your business is viable, at a certain period of time your overall revenue will exceed your overall expenses, including interest." This is an important analysis for potential investors, who want to know that they are investing in a fast-growing business with an exit strategy.

Dig Deeper: How to Price Business Services

How to Write the Financial Section of a Business Plan: How to Use the Financial Section One of the biggest mistakes business people make is to look at their business plan, and particularly the financial section, only once a year. "I like to quote former President Dwight D. Eisenhower," says Berry. "'The plan is useless, but planning is essential.' What people do wrong is focus on the plan, and once the plan is done, it's forgotten. It's really a shame, because they could have used it as a tool for managing the company." In fact, Berry recommends that business executives sit down with the business plan once a month and fill in the actual numbers in the profit and loss statement and compare those numbers with projections. And then use those comparisons to revise projections in the future. Pinson also recommends that you undertake a financial statement analysis to develop a study of relationships and compare items in your financial statements, compare financial statements over time, and even compare your statements to those of other businesses. Part of this is a ratio analysis. She recommends you do some homework and find out some of the prevailing ratios used in your industry for liquidity analysis, profitability analysis, and debt and compare those standard ratios with your own. "This is all for your benefit," she says. "That's what financial statements are for. You should be utilizing your financial statements to measure your business against what you did in prior years or to measure your business against another business like yours."  If you are using your business plan to attract investment or get a loan, you may also include a business financial history as part of the financial section. This is a summary of your business from its start to the present. Sometimes a bank might have a section like this on a loan application. If you are seeking a loan, you may need to add supplementary documents to the financial section, such as the owner's financial statements, listing assets and liabilities. All of the various calculations you need to assemble the financial section of a business plan are a good reason to look for business planning software, so you can have this on your computer and make sure you get this right. Software programs also let you use some of your projections in the financial section to create pie charts or bar graphs that you can use elsewhere in your business plan to highlight your financials, your sales history, or your projected income over three years. "It's a pretty well-known fact that if you are going to seek equity investment from venture capitalists or angel investors," Pinson says, "they do like visuals."

Dig Deeper: How to Protect Your Margins in a Downturn

Related Links: Making It All Add Up: The Financial Section of a Business Plan One of the major benefits of creating a business plan is that it forces entrepreneurs to confront their company's finances squarely. Persuasive Projections You can avoid some of the most common mistakes by following this list of dos and don'ts. Making Your Financials Add Up No business plan is complete until it contains a set of financial projections that are not only inspiring but also logical and defensible. How many years should my financial projections cover for a new business? Some guidelines on what to include. Recommended Resources: Bplans.com More than 100 free sample business plans, plus articles, tips, and tools for developing your plan. Planning, Startups, Stories: Basic Business Numbers An online video in author Tim Berry's blog, outlining what you really need to know about basic business numbers. Out of Your Mind and Into the Marketplace Linda Pinson's business selling books and software for business planning. Palo Alto Software Business-planning tools and information from the maker of the Business Plan Pro software. U.S. Small Business Administration Government-sponsored website aiding small and midsize businesses. Financial Statement Section of a Business Plan for Start-Ups A guide to writing the financial section of a business plan developed by SCORE of northeastern Massachusetts.

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Profitability Analysis: A Comprehensive Guide to Success

February 1, 2024

Profitability analysis is an essential tool for businesses to evaluate their ability to generate a profit, providing insights into how various revenue streams and costs affect financial performance.  

With the right financial analysis software , profitability analysis helps you pinpoint the specific business units, products, customers or assets contributing most to profit, and those that are underperforming.  

It allows you to identify trends over time, operational inefficiencies and opportunities for growth, as well as showcasing the top 10 accounts contributing to revenue.

In this guide, we take a deep dive into all the essential elements of profitability analysis, its benefits and the most common techniques involved. We also share solutions to common challenges and provide a profitability analysis example to give you an idea of what’s involved.

What is the definition of profitability analysis?

Profitability analysis is the process of examining a business’s revenue streams and costs to evaluate its ability to generate profit. It helps you spot opportunities for increasing your bottom line by breaking down the profitability of specific products, geographic locations, business units, initiatives and distribution channels, amongst other factors.

This form of analysis involves using profitability ratios and qualitative data to identify strengths and weaknesses in a business’s revenue generation and cost structures. Such insights can help you prioritise initiatives that enhance profitability, allocate resources effectively and drive sustainable growth.

If you’d like to read more about the fundamentals of financial data analysis , then check out our article on this subject.

Why is profitability analysis important in business?

Profitability analysis is crucial as it allows you to:

• Understand which areas of your business are driving profit.
• Identify where fixed and variable costs need to be reduced.
• Evaluate operational efficiencies and inefficiencies.  
• Spot opportunities to change your product mix to maximise profit.
• See which customer or supplier relationships enhance or detract from profitability.
• Create short and long-term goals to enhance profit and expand your business.
• Spot trends by comparing current profitability against historical data.
• Benchmark profitability against industry standards or competitors.  

Key components of a profitability analysis

There are myriad ways to perform profitability analysis, which typically involves using a variety of ratios as well as qualitative data. Here we explore the most common elements of a profitability analysis for small to medium-sized businesses:

1. Break-even analysis

A break-even analysis allows you to determine the point at which your business will be profitable. Specifically, it identifies the point at which revenue generated from sales covers fixed costs (such as rent, salaries and utilities) and variable costs (like materials and labour), resulting in neither a profit nor loss.

Performing this analysis allows you to understand the minimum level of sales necessary to cover all expenses and begin generating profit. A break-even analysis can also be applied to specific customers to find out how many units must be sold to a customer to break even.

2. Profitability ratios

There are a variety of profitability ratios that allow you to analyse profit. These ratios are financial metrics that provide insight into your business’s ability to generate profit relative to factors including its revenue, operating costs, invested capital and assets.

The two types of profitability ratios generally used for profitability analysis are margin ratios and return ratios. Margin ratios assess a business’s ability to generate profit via sales, while return ratios analyse the returns a business can deliver to shareholders.

3. Customer profitability analysis

Another important area of your business to analyse is the profits specific customers generate. A customer profitability analysis allows you to determine the profit brought in by a customer against the cost of selling to them. It provides insight into which customers are generating the most or least profit, so you know which to focus your attention on.

4. Qualitative analysis

Many businesses incorporate qualitative data into their profitability analysis from customer surveys, focus groups, SWOT analyses or market research. This data can provide contextual insights into customer preferences and market trends that may influence profitability.

Techniques for profitability analysis

Performing a profitability analysis involves using a variety of margin and return ratios. These allow you to examine profitability relative to different costs or assess the profitability of your assets and investments.

In general, the higher the ratio, the better your business’s profitability. Some of the most widely used ratios include:

Gross profit margin

This metric reveals the profit earned from sales after deducting cost of goods sold (COGS), which includes direct production costs as well as administrative and office expenses. Gross profit margin provides COGS as a percentage of sales, allowing you to identify areas for improvement in purchasing and production processes to enhance overall profitability.

(Total revenue - COGS) / (Total revenue)) x 100 = Gross profit margin

Net profit margin

While gross profit margin shows you how much total revenue is left over after deducting COGS, the net profit margin provides a more complete picture. It considers all expenses, including taxes, interest and operational costs, to determine the percentage of net income against sales. This ratio provides the percentage of revenue retained as profit, allowing you to see your business’s overall ability to generate a profit.

(Net income / Sales revenue) x 100 = Net profit margin

Operating profit margin

This ratio provides insight into how efficient your business’s operations are. It shows you the percentage of sales you retain after paying operational expenses, but before paying interest and taxes. A high operating profit margin means your operations are turning a healthy profit and that there’s sufficient cash left over to pay for other expenses.

(Operating profit / Total sales) x 100 = Operating profit margin

Return on assets (ROA)

ROA allows you to gauge the efficiency with which your business is utilising its assets to generate returns, providing visibility of the money generated for every dollar of assets owned. This metric can be applied to your total assets or individual assets, like a piece of equipment, for example.

(Net income / Total assets) x 100 = ROA

Cash flow margin

Cash flow margin calculates how much income, or cash, a business generates from its operating activities relative to its net sales. It reflects the efficiency of converting sales into cash and provides insights into your company’s liquidity.

(Net cash from operating activities / Net sales) x 100 = Cash Flow Margin

Return on equity (ROE)

ROE represents the percentage of earnings shareholders receive in return for their investment in your business. It allows you to see how well your business is managing the capital invested by the shareholders, and the amount of value generated from it.

(Net Income / Shareholders' Equity) = ROE

Return on Investment (ROI)

ROI evaluates the profitability of investments by comparing the gain or loss generated relative to the initial investment cost. It helps you assess the effectiveness of your investment decisions and allocate resources efficiently to achieve optimal returns.

(Net Return / Cost of Investment) = ROI

Benefits of a profitability analysis

Here, we explore the main benefits that profitability analysis can provide your business. It can help you: ‍

1. Identify growth opportunities

Because profitability analysis helps you understand how different parts of your business contribute to profit, you can then target those areas with the most growth potential.  

For instance, an analysis may reveal certain products are more profitable than others. You can then allocate more marketing and sales resources to these products to maximise profits. You may even decide to rationalise your products to drop those that are less profitable and focus all your efforts on those generating the most returns.

2. Monitor performance

By examining profitability trends over time, a historical financial performance record is established and maintained. This record can be used in ongoing assessments of future profitability metrics and facilitates forecasting and strategic planning.

3. Optimise asset utilisation

With a profitability analysis you’ll be able to gain a better understand of how effectively you are leveraging your business’s assets to generate revenue and profit.

Once the analysis is complete your business can gauge how to use its assets more smartly, and strike a balance between reliability and efficiency in asset maintenance moving forward.

4. Enhance your product mix

Profitability analysis helps you identify which of your products or services will generate the highest profits, as well as which ones are the least cost-efficient.

5. Identify your most profitable accounts

For many businesses, some accounts are simply more profitable and less costly. Analysing the profitability of yours will help you understand which top 10 revenue and expense accounts are contributing the most to your bottom line.

6. Enhance operational efficiency

Incorporating cost accounting methods into your profitability analysis allows you to hone in on the processes and activities that are inefficient and driving up costs. This includes:  

• Activity-based costing (ABC): Allows you to assign overhead and indirect costs to particular activities or processes. For instance, ABC can be applied to the activities required to produce different products. You can then see which products require costlier production processes than others.
• Marginal costing: Margin cost refers to the additional cost of producing one more unit of a product or service. With this method, you can see which products or services are more profitable based on the fixed and variable costs incurred to produce them. For instance, if a product has high fixed costs but low variable costs, it will be more profitable to produce it at higher volumes.  
• Standard costing: Setting standard costs for activities or processes allows you to compare actual costs against predefined benchmarks. This allows you to spot variances and inefficiencies and thereby implement corrective actions to improve operations and cost control.

Steps to conduct a profitability analysis

So, now that you have an idea of the key components of profitability analysis, and the various ratios involved, how do you get started? Here we break it down into four key steps:

1. Collect relevant data

Profitability analysis begins by collecting a range of financial data from your financial reports , profit and loss statement, balance sheet, income statement and statement of cashflows.

To benchmark your business against competitors, you'll need to research how you can access your competitor balance sheets.

2. Perform a break-even analysis

The first step when analysing financial performance is to perform a break-even analysis. This allows you to see how much your business needs to sell to cover its fixed and variable costs. You can perform a break-even analysis for your business as a whole, or for individual products and customers.

You can also test break-even points for different scenarios. For instance, you can test scenarios where the price of a product is lower or variable costs are higher, allowing you to see at which point your business no longer breaks even.

3. Conduct profitability ratio analysis

Use the ratios we shared above to calculate margin and return ratios for both your current and prior periods, allowing you to see if profitability is increasing or decreasing over time. This may reveal trends like, for instance, higher volumes of orders but decreasing profitability.

You can gain more granular insights by calculating ratios for specific customers or products. For example, you may realise that while some customers generate high revenue, this may be offset by the high costs involved.

4. Compare profitability to benchmarks

The final step in your profitability analysis should be to compare the results of your break-even and ratio analyses against industry benchmarks and competitors. This helps you gain more understanding of how your business is performing.

For instance, your operating profit margin may seem low in absolute terms, but when compared to the industry average or that of a competitor, you might be performing relatively well.

Profitability analysis example

Let’s look at a profitability analysis example to see how you can gain insights into your business’s costs. In this example, Company ABC will use the activity-based costing method to determine the cost driver rate of producing Product A.

The company has 10 machines set up that incur $15,000 in overhead costs. Five of these machines have been set up to produce 100 units of Product A each day.  

Given there are 10 machines set up and $15,000 in overhead costs, we can first calculate the overhead cost per machine setup:

Overhead cost per machine setup = Total overhead costs / Number of machine setups = $15,000 / 10 = $1,500 per machine setup

Since there are five machines set up to produce 100 units of Product A each day, we can calculate the overhead costs allocated to Product A as follows:

Overhead costs for Product A = Overhead cost per machine setup X Number of machine setups for Product A = $1,500 X 5 = $7,500

Therefore, the overhead costs for producing 100 units of Product A each day using the activity-based costing method amount to $7,500.

How to overcome 4 common profitability analysis challenges

Let’s look at the main challenges many businesses face when performing a profitability analysis and how they can be solved:

1. Data accuracy and availability

Quality data is essential for an accurate profitability analysis, particularly for businesses with diverse data sources and systems. Many businesses, however, face the challenge of consolidating data that’s dispersed across disparate systems or business units. Some data may also be inaccurate or incomplete due to poor data entry and hygiene practices.

Data integration tools and systems can help collect and consolidate data from multiple sources, while robust data governance practices and regular data quality audits can help improve data quality.

2. Limited resources

Resource constraints and a lack of skilled personnel can impede profitability analysis efforts. Small businesses in particular may struggle to find time to gather all the necessary data and perform the calculations needed, which is often a time-consuming process.

Overcoming this challenge requires prioritising profitability analysis as a strategic initiative and allocating sufficient resources to it. Automation of data gathering processes and investment in cash flow analysis tools can help you simplify and speed the process.

3. The complexity of analysis

The complexity of profitability analysis techniques can be challenging for those that don’t have a financial background. To overcome this, you may want to invest in training and development programs to help your staff build financial skills.

You could also seek support from financial experts or invest in software with profitability analysis capabilities, allowing you to save significant time and effort.

By now, you should have a fair understanding of the key elements of a profitability analysis and the kinds of insights it can provide.  

A profitability analysis is indispensable for businesses. It helps you understand which areas of your business are driving profit, those that aren’t, and spot opportunities to cut costs and improve operations.

Given the complexity of some of the work involved, the process is however challenging for many businesses who don't have the time or financial skills required to analyse financial data.  

See how Fathom makes profitability analysis easy

Trusted by over 80,000 organisations worldwide, Fathom provides specific features designed to simplify profitability analysis.

Its profitability tool allows you to evaluate your business’s ability to generate profits and manage fixed and variable costs, providing visualisations to help you make sense of your numbers.

Fathom also makes it easy to create and monitor key profitability KPIs , and integration with accounting platforms like Xero and QuickBooks means you can avoid the hassle of manually transferring financial data.

See for yourself how Fathom makes profitability analysis simple with a free 14-day trial that’s completely credit-card-free.

Fathom is a cloud-based financial intelligence and management reporting app trusted by more than 50,000 companies worldwide.

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In this article:

Profitability Analysis: Step-By-Step Guide

by Maria Del | Mar 13, 2024

Whether you’re a brand-new company trying to break even or you’re already making a steady profit, it’s a good idea to spend some time studying your revenue streams. Specifically, you want to identify the most and least profitable aspects, so you can optimize your company’s performance. Profitability analysis breaks down costs, and what they contribute so you can identify which products or customers most contribute to your profits.

In this article, you will learn about profitability analysis and how it can help your business. You will also learn how to do your own profitability analysis in Google Sheets, step by step.

What is a Profitability Analysis?

Profitability analysis is a component of Enterprise Resource Planning (ERP) that allows you to assess the profitability of different aspects of a new or existing project. It can identify the most and least profitable products, services, and clients, so you can optimize your revenue streams and make smarter decisions.

Why Is Profitability Analysis Important?

Profitability analysis provides an in-depth look at a company’s profits from different perspectives by identifying the factors that most contribute to profitability. Profitability analysis can help you monitor performance, optimize your product mix, maximize the use of resources, and evaluate business relationships.

Profitability Analysis Techniques

Multiple methods can be used to perform a profitability analysis, each focusing on different aspects of the company’s performance. However, there are some core methods that are commonly used by most companies.

Perhaps the most basic and fundamental of these methods is break-even analysis, which is used to figure out how much profit you need to make to cover fixed and variable costs. In other words, it helps you determine how much you need to make in sales in order to remain in business. To learn more, read our article on break-even analysis and how to calculate the break-even point .

Another commonly used method is profitability ratio analysis, which relies on a combination of margin and return ratios. Once calculated, these ratios can provide you with insight into your company’s performance by comparing them to industry benchmarks.

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How to Perform Profitability Analysis?

You can easily perform your own profitability analysis template in Google Sheets or Excel by following the steps below and adding the relevant formulas to your spreadsheet. This will also make it easier to repeat the analysis periodically, which is highly recommended.

1. Gather Data

This is a very important step and requires that absolutely all costs be accounted for, including those that contribute indirectly and are easy to overlook. Missing costs can be misleading, making you think that certain products or customers are more or less profitable than they actually are. In order to make smart decisions, you need accurate data.

2. Break-Even Analysis

This method is commonly used in financial planning, particularly when thinking about investing in a new business or product. Break-even analysis helps you estimate how much you need to sell in order to cover all costs, also known as breaking even. To learn more about it and how you can do your own break-even analysis, check out our article on how to calculate the break-even point.

3. Profitability Ratio Analysis

Profitability ratio analysis focuses on two types of ratios: margin and return. There are many possible ratios that you can use, but you can find some of the most common ones below.

Ideally, you should calculate these ratios separately for different products, customers, etc. The more you can break it down, the more valuable the analysis will be in terms of improving performance and profitability.

Gross Profit Margin

This margin compares gross profit to sales revenue, which shows how much the business is earning, accounting for the cost of producing its goods and services (COGS). A high value suggests that operations are efficient, as it is possible to cover all costs, and the business still has net earnings.

gross profit margin = gross profit / sales

Operating Profit Margin

The operating profit margin expresses earnings before interest and taxes are deducted (EBIT) as a percentage of sales. A high value for this ratio suggests that the business can comfortably pay for its costs and is more likely to survive if the business slows down or prices need to be lowered competitively.

operating profit margin = EBIT / sales

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Net Profit Margin

The net profit margin provides an overall picture of how profitable the business is after all expenses have been considered, including taxes and interest. While it does provide a measure of profitability that takes everything into account, this can be a drawback. Since everything is considered, this also includes one-offs: gains or losses that are unlikely to be repeated, which can provide a distorted picture.

net profit margin = net income / sales

Cash Flow Margin

This ratio measures a business’s ability to turn sales into cash by showing the relationship between the cash generated in the normal course of operations and sales.

cash flow margin = operating cash flows / sales

Return on Assets

This ratio shows the net earnings relative to the total assets. In other words, it measures a company’s ability to generate profits using its assets: it shows how much profit is made after taxes per dollar owned in assets.

return on assets = net income / total assets

Return on Equity

This ratio shows the net earnings relative to stockholders’ equity. In other words, it shows the rate of return on the money that has been put into the company by equity investors.

return on equity = net income / total shareholder’s equity

4. Add context

Generally speaking, the higher the profitability ratios, the better. However, while these ratios can provide some information on their own, they are much more valuable when compared to industry standards.

You need appropriate benchmarks, so you can compare your findings to those of similar companies. There is little point in comparing your values to those of companies that are bigger or smaller, sell different products, etc. This means you’ll have to do some more research on competitors, but your analysis will become much more valuable.

In addition to tracking competitors, you need to track your own profitability over time. This analysis should be repeated periodically so you can analyze changes in profitability and identify trends. In order to save yourself some time and effort, you can easily set up a template in Sheets or Excel with the necessary formulas and speed up the process.

As you have seen, there are many benefits to doing profitability analysis periodically. By keeping track of your profitability ratios over time, you can gain valuable insights into your company’s profits. Instead of just focusing on the revenue they generate, you can identify the products and customers that generate the most and least profit.

You now know about profitability analysis and the most commonly used methods, as well as the benefits of regularly performing this type of analysis. You also know how to set up the formulas in Google Sheets, so you can focus on analyzing the results.

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How To Write A Business Plan (2024 Guide)

Updated: Apr 17, 2024, 11:59am

Table of Contents

Brainstorm an executive summary, create a company description, brainstorm your business goals, describe your services or products, conduct market research, create financial plans, bottom line, frequently asked questions.

Every business starts with a vision, which is distilled and communicated through a business plan. In addition to your high-level hopes and dreams, a strong business plan outlines short-term and long-term goals, budget and whatever else you might need to get started. In this guide, we’ll walk you through how to write a business plan that you can stick to and help guide your operations as you get started.

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Drafting the Summary

An executive summary is an extremely important first step in your business. You have to be able to put the basic facts of your business in an elevator pitch-style sentence to grab investors’ attention and keep their interest. This should communicate your business’s name, what the products or services you’re selling are and what marketplace you’re entering.

Ask for Help

When drafting the executive summary, you should have a few different options. Enlist a few thought partners to review your executive summary possibilities to determine which one is best.

After you have the executive summary in place, you can work on the company description, which contains more specific information. In the description, you’ll need to include your business’s registered name , your business address and any key employees involved in the business. 

The business description should also include the structure of your business, such as sole proprietorship , limited liability company (LLC) , partnership or corporation. This is the time to specify how much of an ownership stake everyone has in the company. Finally, include a section that outlines the history of the company and how it has evolved over time.

Wherever you are on the business journey, you return to your goals and assess where you are in meeting your in-progress targets and setting new goals to work toward.

Numbers-based Goals

Goals can cover a variety of sections of your business. Financial and profit goals are a given for when you’re establishing your business, but there are other goals to take into account as well with regard to brand awareness and growth. For example, you might want to hit a certain number of followers across social channels or raise your engagement rates.

Another goal could be to attract new investors or find grants if you’re a nonprofit business. If you’re looking to grow, you’ll want to set revenue targets to make that happen as well.

Intangible Goals

Goals unrelated to traceable numbers are important as well. These can include seeing your business’s advertisement reach the general public or receiving a terrific client review. These goals are important for the direction you take your business and the direction you want it to go in the future.

The business plan should have a section that explains the services or products that you’re offering. This is the part where you can also describe how they fit in the current market or are providing something necessary or entirely new. If you have any patents or trademarks, this is where you can include those too.

If you have any visual aids, they should be included here as well. This would also be a good place to include pricing strategy and explain your materials.

This is the part of the business plan where you can explain your expertise and different approach in greater depth. Show how what you’re offering is vital to the market and fills an important gap.

You can also situate your business in your industry and compare it to other ones and how you have a competitive advantage in the marketplace.

Other than financial goals, you want to have a budget and set your planned weekly, monthly and annual spending. There are several different costs to consider, such as operational costs.

Business Operations Costs

Rent for your business is the first big cost to factor into your budget. If your business is remote, the cost that replaces rent will be the software that maintains your virtual operations.

Marketing and sales costs should be next on your list. Devoting money to making sure people know about your business is as important as making sure it functions.

Other Costs

Although you can’t anticipate disasters, there are likely to be unanticipated costs that come up at some point in your business’s existence. It’s important to factor these possible costs into your financial plans so you’re not caught totally unaware.

Business plans are important for businesses of all sizes so that you can define where your business is and where you want it to go. Growing your business requires a vision, and giving yourself a roadmap in the form of a business plan will set you up for success.

How do I write a simple business plan?

When you’re working on a business plan, make sure you have as much information as possible so that you can simplify it to the most relevant information. A simple business plan still needs all of the parts included in this article, but you can be very clear and direct.

What are some common mistakes in a business plan?

The most common mistakes in a business plan are common writing issues like grammar errors or misspellings. It’s important to be clear in your sentence structure and proofread your business plan before sending it to any investors or partners.

What basic items should be included in a business plan?

When writing out a business plan, you want to make sure that you cover everything related to your concept for the business,  an analysis of the industry―including potential customers and an overview of the market for your goods or services―how you plan to execute your vision for the business, how you plan to grow the business if it becomes successful and all financial data around the business, including current cash on hand, potential investors and budget plans for the next few years.

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What Is a Business Plan?

Understanding business plans, how to write a business plan, common elements of a business plan, the bottom line, business plan: what it is, what's included, and how to write one.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

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A business plan is a document that outlines a company's goals and the strategies to achieve them. It's valuable for both startups and established companies. For startups, a well-crafted business plan is crucial for attracting potential lenders and investors. Established businesses use business plans to stay on track and aligned with their growth objectives. This article will explain the key components of an effective business plan and guidance on how to write one.

Key Takeaways

• A business plan is a document detailing a company's business activities and strategies for achieving its goals.
• Startup companies use business plans to launch their venture and to attract outside investors.
• For established companies, a business plan helps keep the executive team focused on short- and long-term objectives.
• There's no single required format for a business plan, but certain key elements are essential for most companies.

Investopedia / Ryan Oakley

Any new business should have a business plan in place before beginning operations. Banks and venture capital firms often want to see a business plan before considering making a loan or providing capital to new businesses.

Even if a company doesn't need additional funding, having a business plan helps it stay focused on its goals. Research from the University of Oregon shows that businesses with a plan are significantly more likely to secure funding than those without one. Moreover, companies with a business plan grow 30% faster than those that don't plan. According to a Harvard Business Review article, entrepreneurs who write formal plans are 16% more likely to achieve viability than those who don't.

A business plan should ideally be reviewed and updated periodically to reflect achieved goals or changes in direction. An established business moving in a new direction might even create an entirely new plan.

There are numerous benefits to creating (and sticking to) a well-conceived business plan. It allows for careful consideration of ideas before significant investment, highlights potential obstacles to success, and provides a tool for seeking objective feedback from trusted outsiders. A business plan may also help ensure that a company’s executive team remains aligned on strategic action items and priorities.

While business plans vary widely, even among competitors in the same industry, they often share basic elements detailed below.

A well-crafted business plan is essential for attracting investors and guiding a company's strategic growth. It should address market needs and investor requirements and provide clear financial projections.

While there are any number of templates that you can use to write a business plan, it's best to try to avoid producing a generic-looking one. Let your plan reflect the unique personality of your business.

Many business plans use some combination of the sections below, with varying levels of detail, depending on the company.

The length of a business plan can vary greatly from business to business. Regardless, gathering the basic information into a 15- to 25-page document is best. Any additional crucial elements, such as patent applications, can be referenced in the main document and included as appendices.

Common elements in many business plans include:

• Executive summary : This section introduces the company and includes its mission statement along with relevant information about the company's leadership, employees, operations, and locations.
• Products and services : Describe the products and services the company offers or plans to introduce. Include details on pricing, product lifespan, and unique consumer benefits. Mention production and manufacturing processes, relevant patents , proprietary technology , and research and development (R&D) information.
• Market analysis : Explain the current state of the industry and the competition. Detail where the company fits in, the types of customers it plans to target, and how it plans to capture market share from competitors.
• Marketing strategy : Outline the company's plans to attract and retain customers, including anticipated advertising and marketing campaigns. Describe the distribution channels that will be used to deliver products or services to consumers.
• Financial plans and projections : Established businesses should include financial statements, balance sheets, and other relevant financial information. New businesses should provide financial targets and estimates for the first few years. This section may also include any funding requests.

Investors want to see a clear exit strategy, expected returns, and a timeline for cashing out. It's likely a good idea to provide five-year profitability forecasts and realistic financial estimates.

2 Types of Business Plans

Business plans can vary in format, often categorized into traditional and lean startup plans. According to the U.S. Small Business Administration (SBA) , the traditional business plan is the more common of the two.

• Traditional business plans : These are detailed and lengthy, requiring more effort to create but offering comprehensive information that can be persuasive to potential investors.
• Lean startup business plans : These are concise, sometimes just one page, and focus on key elements. While they save time, companies should be ready to provide additional details if requested by investors or lenders.

Why Do Business Plans Fail?

A business plan isn't a surefire recipe for success. The plan may have been unrealistic in its assumptions and projections. Markets and the economy might change in ways that couldn't have been foreseen. A competitor might introduce a revolutionary new product or service. All this calls for building flexibility into your plan, so you can pivot to a new course if needed.

How Often Should a Business Plan Be Updated?

How frequently a business plan needs to be revised will depend on its nature. Updating your business plan is crucial due to changes in external factors (market trends, competition, and regulations) and internal developments (like employee growth and new products). While a well-established business might want to review its plan once a year and make changes if necessary, a new or fast-growing business in a fiercely competitive market might want to revise it more often, such as quarterly.

What Does a Lean Startup Business Plan Include?

The lean startup business plan is ideal for quickly explaining a business, especially for new companies that don't have much information yet. Key sections may include a value proposition , major activities and advantages, resources (staff, intellectual property, and capital), partnerships, customer segments, and revenue sources.

A well-crafted business plan is crucial for any company, whether it's a startup looking for investment or an established business wanting to stay on course. It outlines goals and strategies, boosting a company's chances of securing funding and achieving growth.

As your business and the market change, update your business plan regularly. This keeps it relevant and aligned with your current goals and conditions. Think of your business plan as a living document that evolves with your company, not something carved in stone.

University of Oregon Department of Economics. " Evaluation of the Effectiveness of Business Planning Using Palo Alto's Business Plan Pro ." Eason Ding & Tim Hursey.

Bplans. " Do You Need a Business Plan? Scientific Research Says Yes ."

Harvard Business Review. " Research: Writing a Business Plan Makes Your Startup More Likely to Succeed ."

Harvard Business Review. " How to Write a Winning Business Plan ."

U.S. Small Business Administration. " Write Your Business Plan ."

SCORE. " When and Why Should You Review Your Business Plan? "

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How to Write a Business Plan for a Small Business

Noah Parsons

24 min. read

Updated September 2, 2024

Writing a business plan doesn’t have to be complicated. 

In this step-by-step guide, you’ll learn how to write a business plan that’s detailed enough to impress bankers and potential investors, while giving you the tools to start, run, and grow a successful business.

• The basics of writing a business plan

If you’re reading this guide, then you already know why you need a business plan . 

You understand that writing a business plan helps you: 

• Raise money
• Grow strategically
• Keep your business on the right track 

As you start to write your business plan, it’s useful to zoom out and remember what a business plan is .

At its core, a business plan is an overview of the products and services you sell, and the customers that you sell to. It explains your business strategy: how you’re going to build and grow your business, what your marketing strategy is, and who your competitors are.

Most business plans also include financial forecasts for the future. These set sales goals, budget for expenses, and predict profits and cash flow. 

A good business plan is much more than just a document that you write once and forget about. It’s also a guide that helps you outline and achieve your goals. 

After writing your business plan, you can use it as a management tool to track your progress toward your goals. Updating and adjusting your forecasts and budgets as you go is one of the most important steps you can take to run a healthier, smarter business. 

We’ll dive into how to use your plan later in this article.

There are many different types of plans , but we’ll go over the most common type here, which includes everything you need for an investor-ready plan. However, if you’re just starting out and are looking for something simpler—I recommend starting with a one-page business plan . It’s faster and easier to create. 

It’s also the perfect place to start if you’re just figuring out your idea, or need a simple strategic plan to use inside your business.

Dig deeper : How to write a one-page business plan

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• What to include in your business plan

Executive summary

The executive summary is an overview of your business and your plans. It comes first in your plan and is ideally just one to two pages. Most people write it last because it’s a summary of the complete business plan.

Ideally, the executive summary can act as a stand-alone document that covers the highlights of your detailed plan. 

In fact, it’s common for investors to ask only for the executive summary when evaluating your business. If they like what they see in the executive summary, they’ll often follow up with a request for a complete plan, a pitch presentation , or more in-depth financial forecasts .

Your executive summary should include:

• A summary of the problem you are solving
• A description of your product or service
• An overview of your target market
• A brief description of your team
• A summary of your financials
• Your funding requirements (if you are raising money)

Dig Deeper: How to write an effective executive summary

Products and services description

When writing a business plan, the produces and services section is where you describe exactly what you’re selling, and how it solves a problem for your target market. The best way to organize this part of your plan is to start by describing the problem that exists for your customers. After that, you can describe how you plan to solve that problem with your product or service. 

This is usually called a problem and solution statement .

To truly showcase the value of your products and services, you need to craft a compelling narrative around your offerings. How will your product or service transform your customers’ lives or jobs? A strong narrative will draw in your readers.

This is also the part of the business plan to discuss any competitive advantages you may have, like specific intellectual property or patents that protect your product. If you have any initial sales, contracts, or other evidence that your product or service is likely to sell, include that information as well. It will show that your idea has traction , which can help convince readers that your plan has a high chance of success.

Market analysis

Your target market is a description of the type of people that you plan to sell to. You might even have multiple target markets, depending on your business. 

A market analysis is the part of your plan where you bring together all of the information you know about your target market. Basically, it’s a thorough description of who your customers are and why they need what you’re selling. You’ll also include information about the growth of your market and your industry .

Try to be as specific as possible when you describe your market. 

Include information such as age, income level, and location—these are what’s called “demographics.” If you can, also describe your market’s interests and habits as they relate to your business—these are “psychographics.” 

Related: Target market examples

Essentially, you want to include any knowledge you have about your customers that is relevant to how your product or service is right for them. With a solid target market, it will be easier to create a sales and marketing plan that will reach your customers. That’s because you know who they are, what they like to do, and the best ways to reach them.

Next, provide any additional information you have about your market. 

What is the size of your market ? Is the market growing or shrinking? Ideally, you’ll want to demonstrate that your market is growing over time, and also explain how your business is positioned to take advantage of any expected changes in your industry.

Dig Deeper: Learn how to write a market analysis

Competitive analysis

Part of defining your business opportunity is determining what your competitive advantage is. To do this effectively, you need to know as much about your competitors as your target customers. 

Every business has some form of competition. If you don’t think you have competitors, then explore what alternatives there are in the market for your product or service. 

For example: In the early years of cars, their main competition was horses. For social media, the early competition was reading books, watching TV, and talking on the phone.

A good competitive analysis fully lays out the competitive landscape and then explains how your business is different. Maybe your products are better made, or cheaper, or your customer service is superior. Maybe your competitive advantage is your location – a wide variety of factors can ultimately give you an advantage.

Dig Deeper: How to write a competitive analysis for your business plan

Marketing and sales plan

The marketing and sales plan covers how you will position your product or service in the market, the marketing channels and messaging you will use, and your sales tactics. 

The best place to start with a marketing plan is with a positioning statement . 

This explains how your business fits into the overall market, and how you will explain the advantages of your product or service to customers. You’ll use the information from your competitive analysis to help you with your positioning. 

For example: You might position your company as the premium, most expensive but the highest quality option in the market. Or your positioning might focus on being locally owned and that shoppers support the local economy by buying your products.

Once you understand your positioning, you’ll bring this together with the information about your target market to create your marketing strategy . 

This is how you plan to communicate your message to potential customers. Depending on who your customers are and how they purchase products like yours, you might use many different strategies, from social media advertising to creating a podcast. Your marketing plan is all about how your customers discover who you are and why they should consider your products and services. 

While your marketing plan is about reaching your customers—your sales plan will describe the actual sales process once a customer has decided that they’re interested in what you have to offer. 

If your business requires salespeople and a long sales process, describe that in this section. If your customers can “self-serve” and just make purchases quickly on your website, describe that process. 

A good sales plan picks up where your marketing plan leaves off. The marketing plan brings customers in the door and the sales plan is how you close the deal.

Together, these specific plans paint a picture of how you will connect with your target audience, and how you will turn them into paying customers.

Dig deeper: What to include in your sales and marketing plan

Business operations

When writing a business plan, the operations section describes the necessary requirements for your business to run smoothly. It’s where you talk about how your business works and what day-to-day operations look like. 

Depending on how your business is structured, your operations plan may include elements of the business like:

• Supply chain management
• Manufacturing processes
• Equipment and technology
• Distribution

Some businesses distribute their products and reach their customers through large retailers like Amazon.com, Walmart, Target, and grocery store chains. 

These businesses should review how this part of their business works. The plan should discuss the logistics and costs of getting products onto store shelves and any potential hurdles the business may have to overcome.

If your business is much simpler than this, that’s OK. This section of your business plan can be either extremely short or more detailed, depending on the type of business you are building.

For businesses selling services, such as physical therapy or online software, you can use this section to describe the technology you’ll leverage, what goes into your service, and who you will partner with to deliver your services.

Dig Deeper: Learn how to write the operations chapter of your plan

Key milestones and metrics

Although it’s not required to complete your business plan, mapping out key business milestones and the metrics can be incredibly useful for measuring your success.

Good milestones clearly lay out the parameters of the task and set expectations for their execution. You’ll want to include:

• A description of each task
• The proposed due date
• Who is responsible for each task

If you have a budget, you can include projected costs to hit each milestone. You don’t need extensive project planning in this section—just list key milestones you want to hit and when you plan to hit them. This is your overall business roadmap. 

Possible milestones might be:

• Website launch date
• Store or office opening date
• First significant sales
• Break even date
• Business licenses and approvals

You should also discuss the key numbers you will track to determine your success. Some common metrics worth tracking include:

• Conversion rates
• Customer acquisition costs
• Profit per customer
• Repeat purchases

It’s perfectly fine to start with just a few metrics and grow the number you are tracking over time. You also may find that some metrics simply aren’t relevant to your business and can narrow down what you’re tracking.

Dig Deeper: How to use milestones in your business plan

Organization and management team

Investors don’t just look for great ideas—they want to find great teams. Use this chapter to describe your current team and who you need to hire . You should also provide a quick overview of your location and history if you’re already up and running.

Briefly highlight the relevant experiences of each key team member in the company. It’s important to make the case for why yours is the right team to turn an idea into a reality. 

Do they have the right industry experience and background? Have members of the team had entrepreneurial successes before? 

If you still need to hire key team members, that’s OK. Just note those gaps in this section.

Your company overview should also include a summary of your company’s current business structure . The most common business structures include:

• Sole proprietor
• Partnership

Be sure to provide an overview of how the business is owned as well. Does each business partner own an equal portion of the business? How is ownership divided? 

Potential lenders and investors will want to know the structure of the business before they will consider a loan or investment.

Dig Deeper: How to write about your company structure and team

Financial plan

The last section of your business plan is your financial plan and forecasts. 

Entrepreneurs often find this section the most daunting. But, business financials for most startups are less complicated than you think, and a business degree is certainly not required to build a solid financial forecast. 

A typical financial forecast in a business plan includes the following:

• Sales forecast : An estimate of the sales expected over a given period. You’ll break down your forecast into the key revenue streams that you expect to have.
• Expense budget : Your planned spending such as personnel costs , marketing expenses, and taxes.
• Profit & Loss : Brings together your sales and expenses and helps you calculate planned profits.
• Cash Flow : Shows how cash moves into and out of your business. It can predict how much cash you’ll have on hand at any given point in the future.
• Balance Sheet : A list of the assets, liabilities, and equity in your company. In short, it provides an overview of the financial health of your business. 

A strong business plan will include a description of assumptions about the future, and potential risks that could impact the financial plan. Including those will be especially important if you’re writing a business plan to pursue a loan or other investment.

Dig Deeper: How to create financial forecasts and budgets

This is the place for additional data, charts, or other information that supports your plan.

Including an appendix can significantly enhance the credibility of your plan by showing readers that you’ve thoroughly considered the details of your business idea, and are backing your ideas up with solid data.

Just remember that the information in the appendix is meant to be supplementary. Your business plan should stand on its own, even if the reader skips this section.

Dig Deeper : What to include in your business plan appendix

Optional: Business plan cover page

Adding a business plan cover page can make your plan, and by extension your business, seem more professional in the eyes of potential investors, lenders, and partners. It serves as the introduction to your document and provides necessary contact information for stakeholders to reference.

Your cover page should be simple and include:

• Company logo
• Business name
• Value proposition (optional)
• Business plan title
• Completion and/or update date
• Address and contact information
• Confidentiality statement

Just remember, the cover page is optional. If you decide to include it, keep it very simple and only spend a short amount of time putting it together.

Dig Deeper: How to create a business plan cover page

How to use AI to help write your business plan

Generative AI tools such as ChatGPT can speed up the business plan writing process and help you think through concepts like market segmentation and competition. These tools are especially useful for taking ideas that you provide and converting them into polished text for your business plan.

The best way to use AI to write a business plan is to leverage it as a collaborator , not a replacement for human creative thinking and ingenuity. 

AI can come up with lots of ideas and act as a brainstorming partner. It’s up to you to filter through those ideas and figure out which ones are realistic enough to resonate with your customers. 

There are pros and cons of using AI to help with your business plan . So, spend some time understanding how it can be most helpful before just outsourcing the job to AI.

Learn more: 10 AI prompts you need to write a business plan

• Writing tips and strategies

To help streamline the business plan writing process, here are a few tips and key questions to answer to make sure you get the most out of your plan and avoid common mistakes .  

Determine why you are writing a business plan

Knowing why you are writing a business plan will determine your approach to your planning project. 

For example: If you are writing a business plan for yourself, or just to use inside your own business , you can probably skip the section about your team and organizational structure. 

If you’re raising money, you’ll want to spend more time explaining why you’re looking to raise the funds and exactly how you will use them.

Regardless of how you intend to use your business plan , think about why you are writing and what you’re trying to get out of the process before you begin.

Keep things concise

Probably the most important tip is to keep your business plan short and simple. There are no prizes for long business plans . The longer your plan is, the less likely people are to read it. 

So focus on trimming things down to the essentials your readers need to know. Skip the extended, wordy descriptions and instead focus on creating a plan that is easy to read —using bullets and short sentences whenever possible.

Have someone review your business plan

Writing a business plan in a vacuum is never a good idea. Sometimes it’s helpful to zoom out and check if your plan makes sense to someone else. You also want to make sure that it’s easy to read and understand.

Don’t wait until your plan is “done” to get a second look. Start sharing your plan early, and find out from readers what questions your plan leaves unanswered. This early review cycle will help you spot shortcomings in your plan and address them quickly, rather than finding out about them right before you present your plan to a lender or investor.

If you need a more detailed review, you may want to explore hiring a professional plan writer to thoroughly examine it.

Use a free business plan template and business plan examples to get started

Knowing what information to include in a business plan is sometimes not quite enough. If you’re struggling to get started or need additional guidance, it may be worth using a business plan template. 

There are plenty of great options available (we’ve rounded up our 8 favorites to streamline your search).

But, if you’re looking for a free downloadable business plan template , you can get one right now; download the template used by more than 1 million businesses. 

Or, if you just want to see what a completed business plan looks like, check out our library of over 550 free business plan examples . 

We even have a growing list of industry business planning guides with tips for what to focus on depending on your business type.

Common pitfalls and how to avoid them

It’s easy to make mistakes when you’re writing your business plan. Some entrepreneurs get sucked into the writing and research process, and don’t focus enough on actually getting their business started. 

Here are a few common mistakes and how to avoid them:

Not talking to your customers : This is one of the most common mistakes. It’s easy to assume that your product or service is something that people want. Before you invest too much in your business and too much in the planning process, make sure you talk to your prospective customers and have a good understanding of their needs.

• Overly optimistic sales and profit forecasts: By nature, entrepreneurs are optimistic about the future. But it’s good to temper that optimism a little when you’re planning, and make sure your forecasts are grounded in reality. 
• Spending too much time planning: Yes, planning is crucial. But you also need to get out and talk to customers, build prototypes of your product and figure out if there’s a market for your idea. Make sure to balance planning with building.
• Not revising the plan: Planning is useful, but nothing ever goes exactly as planned. As you learn more about what’s working and what’s not—revise your plan, your budgets, and your revenue forecast. Doing so will provide a more realistic picture of where your business is going, and what your financial needs will be moving forward.
• Not using the plan to manage your business: A good business plan is a management tool. Don’t just write it and put it on the shelf to collect dust – use it to track your progress and help you reach your goals.
• Presenting your business plan

The planning process forces you to think through every aspect of your business and answer questions that you may not have thought of. That’s the real benefit of writing a business plan – the knowledge you gain about your business that you may not have been able to discover otherwise.

With all of this knowledge, you’re well prepared to convert your business plan into a pitch presentation to present your ideas. 

A pitch presentation is a summary of your plan, just hitting the highlights and key points. It’s the best way to present your business plan to investors and team members.

Dig Deeper: Learn what key slides should be included in your pitch deck

Use your business plan to manage your business

One of the biggest benefits of planning is that it gives you a tool to manage your business better. With a revenue forecast, expense budget, and projected cash flow, you know your targets and where you are headed.

And yet, nothing ever goes exactly as planned – it’s the nature of business.

That’s where using your plan as a management tool comes in. The key to leveraging it for your business is to review it periodically and compare your forecasts and projections to your actual results.

Start by setting up a regular time to review the plan – a monthly review is a good starting point. During this review, answer questions like:

• Did you meet your sales goals?
• Is spending following your budget?
• Has anything gone differently than what you expected?

Now that you see whether you’re meeting your goals or are off track, you can make adjustments and set new targets. 

Maybe you’re exceeding your sales goals and should set new, more aggressive goals. In that case, maybe you should also explore more spending or hiring more employees. 

Or maybe expenses are rising faster than you projected. If that’s the case, you would need to look at where you can cut costs.

A plan, and a method for comparing your plan to your actual results , is the tool you need to steer your business toward success.

Learn More: How to run a regular plan review

How to write a business plan FAQ

What is a business plan?

A document that describes your business , the products and services you sell, and the customers that you sell to. It explains your business strategy, how you’re going to build and grow your business, what your marketing strategy is, and who your competitors are.

What are the benefits of writing a business plan?

A business plan helps you understand where you want to go with your business and what it will take to get there. It reduces your overall risk, helps you uncover your business’s potential, attracts investors, and identifies areas for growth.

Writing a business plan ultimately makes you more confident as a business owner and more likely to succeed for a longer period of time.

What are the 7 steps of writing a business plan?

The seven steps to writing a business plan include:

• Write a brief executive summary
• Describe your products and services.
• Conduct market research and compile data into a cohesive market analysis.
• Describe your marketing and sales strategy.
• Outline your organizational structure and management team.
• Develop financial projections for sales, revenue, and cash flow.
• Add any additional documents to your appendix.

What are the 5 most common business plan mistakes?

There are plenty of mistakes that can be made when writing a business plan. However, these are the 5 most common that you should do your best to avoid:

• 1. Not taking the planning process seriously.
• Having unrealistic financial projections or incomplete financial information.
• Inconsistent information or simple mistakes.
• Failing to establish a sound business model.
• Not having a defined purpose for your business plan.

What questions should be answered in a business plan?

Writing a business plan is all about asking yourself questions about your business and being able to answer them through the planning process. You’ll likely be asking dozens and dozens of questions for each section of your plan.

However, these are the key questions you should ask and answer with your business plan:

• How will your business make money?
• Is there a need for your product or service?
• Who are your customers?
• How are you different from the competition?
• How will you reach your customers?
• How will you measure success?

How long should a business plan be?

The length of your business plan fully depends on what you intend to do with it. From the SBA and traditional lender point of view, a business plan needs to be whatever length necessary to fully explain your business. This means that you prove the viability of your business, show that you understand the market, and have a detailed strategy in place.

If you intend to use your business plan for internal management purposes, you don’t necessarily need a full 25-50 page business plan. Instead, you can start with a one-page plan to get all of the necessary information in place.

What are the different types of business plans?

While all business plans cover similar categories, the style and function fully depend on how you intend to use your plan. Here are a few common business plan types worth considering.

Traditional business plan: The tried-and-true traditional business plan is a formal document meant to be used when applying for funding or pitching to investors. This type of business plan follows the outline above and can be anywhere from 10-50 pages depending on the amount of detail included, the complexity of your business, and what you include in your appendix.

Business model canvas: The business model canvas is a one-page template designed to demystify the business planning process. It removes the need for a traditional, copy-heavy business plan, in favor of a single-page outline that can help you and outside parties better explore your business idea.

One-page business plan: This format is a simplified version of the traditional plan that focuses on the core aspects of your business. You’ll typically stick with bullet points and single sentences. It’s most useful for those exploring ideas, needing to validate their business model, or who need an internal plan to help them run and manage their business.

Lean Plan: The Lean Plan is less of a specific document type and more of a methodology. It takes the simplicity and styling of the one-page business plan and turns it into a process for you to continuously plan, test, review, refine, and take action based on performance. It’s faster, keeps your plan concise, and ensures that your plan is always up-to-date.

What’s the difference between a business plan and a strategic plan?

A business plan covers the “who” and “what” of your business. It explains what your business is doing right now and how it functions. The strategic plan explores long-term goals and explains “how” the business will get there. It encourages you to look more intently toward the future and how you will achieve your vision.

However, when approached correctly, your business plan can actually function as a strategic plan as well. If kept lean, you can define your business, outline strategic steps, and track ongoing operations all with a single plan.

Noah is the COO at Palo Alto Software, makers of the online business plan app LivePlan. He started his career at Yahoo! and then helped start the user review site Epinions.com. From there he started a software distribution business in the UK before coming to Palo Alto Software to run the marketing and product teams.

Table of Contents

• Use AI to help write your plan
• Common planning mistakes
• Manage with your business plan

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How to create a business plan: examples & free template.

This is the ultimate guide to creating a comprehensive and effective plan to start a business . In today’s dynamic business landscape, having a well-crafted business plan is an important first step to securing funding, attracting partners, and navigating the challenges of entrepreneurship.

This guide has been designed to help you create a winning plan that stands out in the ever-evolving marketplace. U sing real-world examples and a free downloadable template, it will walk you through each step of the process.

Whether you’re a seasoned entrepreneur or launching your very first startup, the guide will give you the insights, tools, and confidence you need to create a solid foundation for your business.

Table of Contents

How to Write a Business Plan

Embarking on the journey of creating a successful business requires a solid foundation, and a well-crafted business plan is the cornerstone. Here is the process of writing a comprehensive business plan and the main parts of a winning business plan . From setting objectives to conducting market research, this guide will have everything you need.

Executive Summary

The Executive Summary serves as the gateway to your business plan, offering a snapshot of your venture’s core aspects. This section should captivate and inform, succinctly summarizing the essence of your plan.

It’s crucial to include a clear mission statement, a brief description of your primary products or services, an overview of your target market, and key financial projections or achievements.

Think of it as an elevator pitch in written form: it should be compelling enough to engage potential investors or stakeholders and provide them with a clear understanding of what your business is about, its goals, and why it’s a promising investment.

Example: EcoTech is a technology company specializing in eco-friendly and sustainable products designed to reduce energy consumption and minimize waste. Our mission is to create innovative solutions that contribute to a cleaner, greener environment.

Our target market includes environmentally conscious consumers and businesses seeking to reduce their carbon footprint. We project a 200% increase in revenue within the first three years of operation.

Overview and Business Objectives

In the Overview and Business Objectives section, outline your business’s core goals and the strategic approaches you plan to use to achieve them. This section should set forth clear, specific objectives that are attainable and time-bound, providing a roadmap for your business’s growth and success.

It’s important to detail how these objectives align with your company’s overall mission and vision. Discuss the milestones you aim to achieve and the timeframe you’ve set for these accomplishments.

This part of the plan demonstrates to investors and stakeholders your vision for growth and the practical steps you’ll take to get there.

Example: EcoTech’s primary objective is to become a market leader in sustainable technology products within the next five years. Our key objectives include:

• Introducing three new products within the first two years of operation.
• Achieving annual revenue growth of 30%.
• Expanding our customer base to over 10,000 clients by the end of the third year.

Company Description

The Company Description section is your opportunity to delve into the details of your business. Provide a comprehensive overview that includes your company’s history, its mission statement, and its vision for the future.

Highlight your unique selling proposition (USP) – what makes your business stand out in the market. Explain the problems your company solves and how it benefits your customers.

Include information about the company’s founders, their expertise, and why they are suited to lead the business to success. This section should paint a vivid picture of your business, its values, and its place in the industry.

Example: EcoTech is committed to developing cutting-edge sustainable technology products that benefit both the environment and our customers. Our unique combination of innovative solutions and eco-friendly design sets us apart from the competition. We envision a future where technology and sustainability go hand in hand, leading to a greener planet.

Define Your Target Market

Defining Your Target Market is critical for tailoring your business strategy effectively. This section should describe your ideal customer base in detail, including demographic information (such as age, gender, income level, and location) and psychographic data (like interests, values, and lifestyle).

Elucidate on the specific needs or pain points of your target audience and how your product or service addresses these. This information will help you know your target market and develop targeted marketing strategies.

Example: Our target market comprises environmentally conscious consumers and businesses looking for innovative solutions to reduce their carbon footprint. Our ideal customers are those who prioritize sustainability and are willing to invest in eco-friendly products.

Market Analysis

The Market Analysis section requires thorough research and a keen understanding of the industry. It involves examining the current trends within your industry, understanding the needs and preferences of your customers, and analyzing the strengths and weaknesses of your competitors.

This analysis will enable you to spot market opportunities and anticipate potential challenges. Include data and statistics to back up your claims, and use graphs or charts to illustrate market trends.

This section should demonstrate that you have a deep understanding of the market in which you operate and that your business is well-positioned to capitalize on its opportunities.

Example: The market for eco-friendly technology products has experienced significant growth in recent years, with an estimated annual growth rate of 10%. As consumers become increasingly aware of environmental issues, the demand for sustainable solutions continues to rise.

Our research indicates a gap in the market for high-quality, innovative eco-friendly technology products that cater to both individual and business clients.

SWOT Analysis

A SWOT analysis in your business plan offers a comprehensive examination of your company’s internal and external factors. By assessing Strengths, you showcase what your business does best and where your capabilities lie.

Weaknesses involve an honest introspection of areas where your business may be lacking or could improve. Opportunities can be external factors that your business could capitalize on, such as market gaps or emerging trends.

Threats include external challenges your business may face, like competition or market changes. This analysis is crucial for strategic planning, as it helps in recognizing and leveraging your strengths, addressing weaknesses, seizing opportunities, and preparing for potential threats.

Including a SWOT analysis demonstrates to stakeholders that you have a balanced and realistic understanding of your business in its operational context.

• Innovative and eco-friendly product offerings.
• Strong commitment to sustainability and environmental responsibility.
• Skilled and experienced team with expertise in technology and sustainability.

Weaknesses:

• Limited brand recognition compared to established competitors.
• Reliance on third-party manufacturers for product development.

Opportunities:

• Growing consumer interest in sustainable products.
• Partnerships with environmentally-focused organizations and influencers.
• Expansion into international markets.
• Intense competition from established technology companies.
• Regulatory changes could impact the sustainable technology market.

Competitive Analysis

In this section, you’ll analyze your competitors in-depth, examining their products, services, market positioning, and pricing strategies. Understanding your competition allows you to identify gaps in the market and tailor your offerings to outperform them.

By conducting a thorough competitive analysis, you can gain insights into your competitors’ strengths and weaknesses, enabling you to develop strategies to differentiate your business and gain a competitive advantage in the marketplace.

Example: Key competitors include:

GreenTech: A well-known brand offering eco-friendly technology products, but with a narrower focus on energy-saving devices.

EarthSolutions: A direct competitor specializing in sustainable technology, but with a limited product range and higher prices.

By offering a diverse product portfolio, competitive pricing, and continuous innovation, we believe we can capture a significant share of the growing sustainable technology market.

Organization and Management Team

Provide an overview of your company’s organizational structure, including key roles and responsibilities. Introduce your management team, highlighting their expertise and experience to demonstrate that your team is capable of executing the business plan successfully.

Showcasing your team’s background, skills, and accomplishments instills confidence in investors and other stakeholders, proving that your business has the leadership and talent necessary to achieve its objectives and manage growth effectively.

Example: EcoTech’s organizational structure comprises the following key roles: CEO, CTO, CFO, Sales Director, Marketing Director, and R&D Manager. Our management team has extensive experience in technology, sustainability, and business development, ensuring that we are well-equipped to execute our business plan successfully.

Products and Services Offered

Describe the products or services your business offers, focusing on their unique features and benefits. Explain how your offerings solve customer pain points and why they will choose your products or services over the competition.

This section should emphasize the value you provide to customers, demonstrating that your business has a deep understanding of customer needs and is well-positioned to deliver innovative solutions that address those needs and set your company apart from competitors.

Example: EcoTech offers a range of eco-friendly technology products, including energy-efficient lighting solutions, solar chargers, and smart home devices that optimize energy usage. Our products are designed to help customers reduce energy consumption, minimize waste, and contribute to a cleaner environment.

Marketing and Sales Strategy

In this section, articulate your comprehensive strategy for reaching your target market and driving sales. Detail the specific marketing channels you plan to use, such as social media, email marketing, SEO, or traditional advertising.

Describe the nature of your advertising campaigns and promotional activities, explaining how they will capture the attention of your target audience and convey the value of your products or services. Outline your sales strategy, including your sales process, team structure, and sales targets.

Discuss how these marketing and sales efforts will work together to attract and retain customers, generate leads, and ultimately contribute to achieving your business’s revenue goals.

This section is critical to convey to investors and stakeholders that you have a well-thought-out approach to market your business effectively and drive sales growth.

Example: Our marketing strategy includes digital advertising, content marketing, social media promotion, and influencer partnerships. We will also attend trade shows and conferences to showcase our products and connect with potential clients. Our sales strategy involves both direct sales and partnerships with retail stores, as well as online sales through our website and e-commerce platforms.

Logistics and Operations Plan

The Logistics and Operations Plan is a critical component that outlines the inner workings of your business. It encompasses the management of your supply chain, detailing how you acquire raw materials and manage vendor relationships.

Inventory control is another crucial aspect, where you explain strategies for inventory management to ensure efficiency and reduce wastage. The section should also describe your production processes, emphasizing scalability and adaptability to meet changing market demands.

Quality control measures are essential to maintain product standards and customer satisfaction. This plan assures investors and stakeholders of your operational competency and readiness to meet business demands.

Highlighting your commitment to operational efficiency and customer satisfaction underlines your business’s capability to maintain smooth, effective operations even as it scales.

Example: EcoTech partners with reliable third-party manufacturers to produce our eco-friendly technology products. Our operations involve maintaining strong relationships with suppliers, ensuring quality control, and managing inventory.

We also prioritize efficient distribution through various channels, including online platforms and retail partners, to deliver products to our customers in a timely manner.

Financial Projections Plan

In the Financial Projections Plan, lay out a clear and realistic financial future for your business. This should include detailed projections for revenue, costs, and profitability over the next three to five years.

Ground these projections in solid assumptions based on your market analysis, industry benchmarks, and realistic growth scenarios. Break down revenue streams and include an analysis of the cost of goods sold, operating expenses, and potential investments.

This section should also discuss your break-even analysis, cash flow projections, and any assumptions about external funding requirements.

By presenting a thorough and data-backed financial forecast, you instill confidence in potential investors and lenders, showcasing your business’s potential for profitability and financial stability.

This forward-looking financial plan is crucial for demonstrating that you have a firm grasp of the financial nuances of your business and are prepared to manage its financial health effectively.

Example: Over the next three years, we expect to see significant growth in revenue, driven by new product launches and market expansion. Our financial projections include:

• Year 1: $1.5 million in revenue, with a net profit of $200,000.
• Year 2: $3 million in revenue, with a net profit of $500,000.
• Year 3: $4.5 million in revenue, with a net profit of $1 million.

These projections are based on realistic market analysis, growth rates, and product pricing.

Income Statement

The income statement , also known as the profit and loss statement, provides a summary of your company’s revenues and expenses over a specified period. It helps you track your business’s financial performance and identify trends, ensuring you stay on track to achieve your financial goals.

Regularly reviewing and analyzing your income statement allows you to monitor the health of your business, evaluate the effectiveness of your strategies, and make data-driven decisions to optimize profitability and growth.

Example: The income statement for EcoTech’s first year of operation is as follows:

• Revenue: $1,500,000
• Cost of Goods Sold: $800,000
• Gross Profit: $700,000
• Operating Expenses: $450,000
• Net Income: $250,000

This statement highlights our company’s profitability and overall financial health during the first year of operation.

Cash Flow Statement

A cash flow statement is a crucial part of a financial business plan that shows the inflows and outflows of cash within your business. It helps you monitor your company’s liquidity, ensuring you have enough cash on hand to cover operating expenses, pay debts, and invest in growth opportunities.

By including a cash flow statement in your business plan, you demonstrate your ability to manage your company’s finances effectively.

Example:  The cash flow statement for EcoTech’s first year of operation is as follows:

Operating Activities:

• Depreciation: $10,000
• Changes in Working Capital: -$50,000
• Net Cash from Operating Activities: $210,000

Investing Activities:

•  Capital Expenditures: -$100,000
• Net Cash from Investing Activities: -$100,000

Financing Activities:

• Proceeds from Loans: $150,000
• Loan Repayments: -$50,000
• Net Cash from Financing Activities: $100,000
• Net Increase in Cash: $210,000

This statement demonstrates EcoTech’s ability to generate positive cash flow from operations, maintain sufficient liquidity, and invest in growth opportunities.

Tips on Writing a Business Plan

1. Be clear and concise: Keep your language simple and straightforward. Avoid jargon and overly technical terms. A clear and concise business plan is easier for investors and stakeholders to understand and demonstrates your ability to communicate effectively.

2. Conduct thorough research: Before writing your business plan, gather as much information as possible about your industry, competitors, and target market. Use reliable sources and industry reports to inform your analysis and make data-driven decisions.

3. Set realistic goals: Your business plan should outline achievable objectives that are specific, measurable, attainable, relevant, and time-bound (SMART). Setting realistic goals demonstrates your understanding of the market and increases the likelihood of success.

4. Focus on your unique selling proposition (USP): Clearly articulate what sets your business apart from the competition. Emphasize your USP throughout your business plan to showcase your company’s value and potential for success.

5. Be flexible and adaptable: A business plan is a living document that should evolve as your business grows and changes. Be prepared to update and revise your plan as you gather new information and learn from your experiences.

6. Use visuals to enhance understanding: Include charts, graphs, and other visuals to help convey complex data and ideas. Visuals can make your business plan more engaging and easier to digest, especially for those who prefer visual learning.

7. Seek feedback from trusted sources: Share your business plan with mentors, industry experts, or colleagues and ask for their feedback. Their insights can help you identify areas for improvement and strengthen your plan before presenting it to potential investors or partners.

FREE Business Plan Template

To help you get started on your business plan, we have created a template that includes all the essential components discussed in the “How to Write a Business Plan” section. This easy-to-use template will guide you through each step of the process, ensuring you don’t miss any critical details.

The template is divided into the following sections:

• Mission statement
• Business Overview
• Key products or services
• Target market
• Financial highlights
• Company goals
• Strategies to achieve goals
• Measurable, time-bound objectives
• Company History
• Mission and vision
• Unique selling proposition
• Demographics
• Psychographics
• Pain points
• Industry trends
• Customer needs
• Competitor strengths and weaknesses
• Opportunities
• Competitor products and services
• Market positioning
• Pricing strategies
• Organizational structure
• Key roles and responsibilities
• Management team backgrounds
• Product or service features
• Competitive advantages
• Marketing channels
• Advertising campaigns
• Promotional activities
• Sales strategies
• Supply chain management
• Inventory control
• Production processes
• Quality control measures
• Projected revenue
• Assumptions
• Cash inflows
• Cash outflows
• Net cash flow

What is a Business Plan?

A business plan is a strategic document that outlines an organization’s goals, objectives, and the steps required to achieve them. It serves as a roadmap as you start a business , guiding the company’s direction and growth while identifying potential obstacles and opportunities.

Typically, a business plan covers areas such as market analysis, financial projections, marketing strategies, and organizational structure. It not only helps in securing funding from investors and lenders but also provides clarity and focus to the management team.

A well-crafted business plan is a very important part of your business startup checklist because it fosters informed decision-making and long-term success.

Why You Should Write a Business Plan

Understanding the importance of a business plan in today’s competitive environment is crucial for entrepreneurs and business owners. Here are five compelling reasons to write a business plan:

• Attract Investors and Secure Funding : A well-written business plan demonstrates your venture’s potential and profitability, making it easier to attract investors and secure the necessary funding for growth and development. It provides a detailed overview of your business model, target market, financial projections, and growth strategies, instilling confidence in potential investors and lenders that your company is a worthy investment.
• Clarify Business Objectives and Strategies : Crafting a business plan forces you to think critically about your goals and the strategies you’ll employ to achieve them, providing a clear roadmap for success. This process helps you refine your vision and prioritize the most critical objectives, ensuring that your efforts are focused on achieving the desired results.
• Identify Potential Risks and Opportunities : Analyzing the market, competition, and industry trends within your business plan helps identify potential risks and uncover untapped opportunities for growth and expansion. This insight enables you to develop proactive strategies to mitigate risks and capitalize on opportunities, positioning your business for long-term success.
• Improve Decision-Making : A business plan serves as a reference point so you can make informed decisions that align with your company’s overall objectives and long-term vision. By consistently referring to your plan and adjusting it as needed, you can ensure that your business remains on track and adapts to changes in the market, industry, or internal operations.
• Foster Team Alignment and Communication : A shared business plan helps ensure that all team members are on the same page, promoting clear communication, collaboration, and a unified approach to achieving the company’s goals. By involving your team in the planning process and regularly reviewing the plan together, you can foster a sense of ownership, commitment, and accountability that drives success.

What are the Different Types of Business Plans?

In today’s fast-paced business world, having a well-structured roadmap is more important than ever. A traditional business plan provides a comprehensive overview of your company’s goals and strategies, helping you make informed decisions and achieve long-term success. There are various types of business plans, each designed to suit different needs and purposes. Let’s explore the main types:

• Startup Business Plan: Tailored for new ventures, a startup business plan outlines the company’s mission, objectives, target market, competition, marketing strategies, and financial projections. It helps entrepreneurs clarify their vision, secure funding from investors, and create a roadmap for their business’s future. Additionally, this plan identifies potential challenges and opportunities, which are crucial for making informed decisions and adapting to changing market conditions.
• Internal Business Plan: This type of plan is intended for internal use, focusing on strategies, milestones, deadlines, and resource allocation. It serves as a management tool for guiding the company’s growth, evaluating its progress, and ensuring that all departments are aligned with the overall vision. The internal business plan also helps identify areas of improvement, fosters collaboration among team members, and provides a reference point for measuring performance.
• Strategic Business Plan: A strategic business plan outlines long-term goals and the steps to achieve them, providing a clear roadmap for the company’s direction. It typically includes a SWOT analysis, market research, and competitive analysis. This plan allows businesses to align their resources with their objectives, anticipate changes in the market, and develop contingency plans. By focusing on the big picture, a strategic business plan fosters long-term success and stability.
• Feasibility Business Plan: This plan is designed to assess the viability of a business idea, examining factors such as market demand, competition, and financial projections. It is often used to decide whether or not to pursue a particular venture. By conducting a thorough feasibility analysis, entrepreneurs can avoid investing time and resources into an unviable business concept. This plan also helps refine the business idea, identify potential obstacles, and determine the necessary resources for success.
• Growth Business Plan: Also known as an expansion plan, a growth business plan focuses on strategies for scaling up an existing business. It includes market analysis, new product or service offerings, and financial projections to support expansion plans. This type of plan is essential for businesses looking to enter new markets, increase their customer base, or launch new products or services. By outlining clear growth strategies, the plan helps ensure that expansion efforts are well-coordinated and sustainable.
• Operational Business Plan: This type of plan outlines the company’s day-to-day operations, detailing the processes, procedures, and organizational structure. It is an essential tool for managing resources, streamlining workflows, and ensuring smooth operations. The operational business plan also helps identify inefficiencies, implement best practices, and establish a strong foundation for future growth. By providing a clear understanding of daily operations, this plan enables businesses to optimize their resources and enhance productivity.
• Lean Business Plan: A lean business plan is a simplified, agile version of a traditional plan, focusing on key elements such as value proposition, customer segments, revenue streams, and cost structure. It is perfect for startups looking for a flexible, adaptable planning approach. The lean business plan allows for rapid iteration and continuous improvement, enabling businesses to pivot and adapt to changing market conditions. This streamlined approach is particularly beneficial for businesses in fast-paced or uncertain industries.
• One-Page Business Plan: As the name suggests, a one-page business plan is a concise summary of your company’s key objectives, strategies, and milestones. It serves as a quick reference guide and is ideal for pitching to potential investors or partners. This plan helps keep teams focused on essential goals and priorities, fosters clear communication, and provides a snapshot of the company’s progress. While not as comprehensive as other plans, a one-page business plan is an effective tool for maintaining clarity and direction.
• Nonprofit Business Plan: Specifically designed for nonprofit organizations, this plan outlines the mission, goals, target audience, fundraising strategies, and budget allocation. It helps secure grants and donations while ensuring the organization stays on track with its objectives. The nonprofit business plan also helps attract volunteers, board members, and community support. By demonstrating the organization’s impact and plans for the future, this plan is essential for maintaining transparency, accountability, and long-term sustainability within the nonprofit sector.
• Franchise Business Plan: For entrepreneurs seeking to open a franchise, this type of plan focuses on the franchisor’s requirements, as well as the franchisee’s goals, strategies, and financial projections. It is crucial for securing a franchise agreement and ensuring the business’s success within the franchise system. This plan outlines the franchisee’s commitment to brand standards, marketing efforts, and operational procedures, while also addressing local market conditions and opportunities. By creating a solid franchise business plan, entrepreneurs can demonstrate their ability to effectively manage and grow their franchise, increasing the likelihood of a successful partnership with the franchisor.

Using Business Plan Software

Creating a comprehensive business plan can be intimidating, but business plan software can streamline the process and help you produce a professional document. These tools offer a number of benefits, including guided step-by-step instructions, financial projections, and industry-specific templates. Here are the top 5 business plan software options available to help you craft a great business plan.

1. LivePlan

LivePlan is a popular choice for its user-friendly interface and comprehensive features. It offers over 500 sample plans, financial forecasting tools, and the ability to track your progress against key performance indicators. With LivePlan, you can create visually appealing, professional business plans that will impress investors and stakeholders.

2. Upmetrics

Upmetrics provides a simple and intuitive platform for creating a well-structured business plan. It features customizable templates, financial forecasting tools, and collaboration capabilities, allowing you to work with team members and advisors. Upmetrics also offers a library of resources to guide you through the business planning process.

Bizplan is designed to simplify the business planning process with a drag-and-drop builder and modular sections. It offers financial forecasting tools, progress tracking, and a visually appealing interface. With Bizplan, you can create a business plan that is both easy to understand and visually engaging.

Enloop is a robust business plan software that automatically generates a tailored plan based on your inputs. It provides industry-specific templates, financial forecasting, and a unique performance score that updates as you make changes to your plan. Enloop also offers a free version, making it accessible for businesses on a budget.

5. Tarkenton GoSmallBiz

Developed by NFL Hall of Famer Fran Tarkenton, GoSmallBiz is tailored for small businesses and startups. It features a guided business plan builder, customizable templates, and financial projection tools. GoSmallBiz also offers additional resources, such as CRM tools and legal document templates, to support your business beyond the planning stage.

Business Plan FAQs

What is a good business plan.

A good business plan is a well-researched, clear, and concise document that outlines a company’s goals, strategies, target market, competitive advantages, and financial projections. It should be adaptable to change and provide a roadmap for achieving success.

What are the 3 main purposes of a business plan?

The three main purposes of a business plan are to guide the company’s strategy, attract investment, and evaluate performance against objectives. Here’s a closer look at each of these:

• It outlines the company’s purpose and core values to ensure that all activities align with its mission and vision.
• It provides an in-depth analysis of the market, including trends, customer needs, and competition, helping the company tailor its products and services to meet market demands.
• It defines the company’s marketing and sales strategies, guiding how the company will attract and retain customers.
• It describes the company’s organizational structure and management team, outlining roles and responsibilities to ensure effective operation and leadership.
• It sets measurable, time-bound objectives, allowing the company to plan its activities effectively and make strategic decisions to achieve these goals.
• It provides a comprehensive overview of the company and its business model, demonstrating its uniqueness and potential for success.
• It presents the company’s financial projections, showing its potential for profitability and return on investment.
• It demonstrates the company’s understanding of the market, including its target customers and competition, convincing investors that the company is capable of gaining a significant market share.
• It showcases the management team’s expertise and experience, instilling confidence in investors that the team is capable of executing the business plan successfully.
• It establishes clear, measurable objectives that serve as performance benchmarks.
• It provides a basis for regular performance reviews, allowing the company to monitor its progress and identify areas for improvement.
• It enables the company to assess the effectiveness of its strategies and make adjustments as needed to achieve its objectives.
• It helps the company identify potential risks and challenges, enabling it to develop contingency plans and manage risks effectively.
• It provides a mechanism for evaluating the company’s financial performance, including revenue, expenses, profitability, and cash flow.

Can I write a business plan by myself?

Yes, you can write a business plan by yourself, but it can be helpful to consult with mentors, colleagues, or industry experts to gather feedback and insights. There are also many creative business plan templates and business plan examples available online, including those above.

We also have examples for specific industries, including a using food truck business plan , salon business plan , farm business plan , daycare business plan , and restaurant business plan .

Is it possible to create a one-page business plan?

Yes, a one-page business plan is a condensed version that highlights the most essential elements, including the company’s mission, target market, unique selling proposition, and financial goals.

How long should a business plan be?

A typical business plan ranges from 20 to 50 pages, but the length may vary depending on the complexity and needs of the business.

What is a business plan outline?

A business plan outline is a structured framework that organizes the content of a business plan into sections, such as the executive summary, company description, market analysis, and financial projections.

What are the 5 most common business plan mistakes?

The five most common business plan mistakes include inadequate research, unrealistic financial projections, lack of focus on the unique selling proposition, poor organization and structure, and failure to update the plan as circumstances change.

What questions should be asked in a business plan?

A business plan should address questions such as: What problem does the business solve? Who is the specific target market ? What is the unique selling proposition? What are the company’s objectives? How will it achieve those objectives?

What’s the difference between a business plan and a strategic plan?

A business plan focuses on the overall vision, goals, and tactics of a company, while a strategic plan outlines the specific strategies, action steps, and performance measures necessary to achieve the company’s objectives.

How is business planning for a nonprofit different?

Nonprofit business planning focuses on the organization’s mission, social impact, and resource management, rather than profit generation. The financial section typically includes funding sources, expenses, and projected budgets for programs and operations.

Image: Envato Elements

Free Financial Templates for a Business Plan

By Andy Marker | July 29, 2020

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In this article, we’ve rounded up expert-tested financial templates for your business plan, all of which are free to download in Excel, Google Sheets, and PDF formats.

Included on this page, you’ll find the essential financial statement templates, including income statement templates , cash flow statement templates , and balance sheet templates . Plus, we cover the key elements of the financial section of a business plan .

Financial Plan Templates

Download and prepare these financial plan templates to include in your business plan. Use historical data and future projections to produce an overview of the financial health of your organization to support your business plan and gain buy-in from stakeholders

Business Financial Plan Template

Use this financial plan template to organize and prepare the financial section of your business plan. This customizable template has room to provide a financial overview, any important assumptions, key financial indicators and ratios, a break-even analysis, and pro forma financial statements to share key financial data with potential investors.

Download Financial Plan Template

Word | PDF | Smartsheet

Financial Plan Projections Template for Startups

This financial plan projections template comes as a set of pro forma templates designed to help startups. The template set includes a 12-month profit and loss statement, a balance sheet, and a cash flow statement for you to detail the current and projected financial position of a business.

‌ Download Startup Financial Projections Template

Excel | Smartsheet

Income Statement Templates for Business Plan

Also called profit and loss statements , these income statement templates will empower you to make critical business decisions by providing insight into your company, as well as illustrating the projected profitability associated with business activities. The numbers prepared in your income statement directly influence the cash flow and balance sheet forecasts.

Pro Forma Income Statement/Profit and Loss Sample

Use this pro forma income statement template to project income and expenses over a three-year time period. Pro forma income statements consider historical or market analysis data to calculate the estimated sales, cost of sales, profits, and more.

‌ Download Pro Forma Income Statement Sample - Excel

Small Business Profit and Loss Statement

Small businesses can use this simple profit and loss statement template to project income and expenses for a specific time period. Enter expected income, cost of goods sold, and business expenses, and the built-in formulas will automatically calculate the net income.

‌ Download Small Business Profit and Loss Template - Excel

3-Year Income Statement Template

Use this income statement template to calculate and assess the profit and loss generated by your business over three years. This template provides room to enter revenue and expenses associated with operating your business and allows you to track performance over time.

Download 3-Year Income Statement Template

For additional resources, including how to use profit and loss statements, visit “ Download Free Profit and Loss Templates .”

Cash Flow Statement Templates for Business Plan

Use these free cash flow statement templates to convey how efficiently your company manages the inflow and outflow of money. Use a cash flow statement to analyze the availability of liquid assets and your company’s ability to grow and sustain itself long term.

Simple Cash Flow Template

Use this basic cash flow template to compare your business cash flows against different time periods. Enter the beginning balance of cash on hand, and then detail itemized cash receipts, payments, costs of goods sold, and expenses. Once you enter those values, the built-in formulas will calculate total cash payments, net cash change, and the month ending cash position.

Download Simple Cash Flow Template

12-Month Cash Flow Forecast Template

Use this cash flow forecast template, also called a pro forma cash flow template, to track and compare expected and actual cash flow outcomes on a monthly and yearly basis. Enter the cash on hand at the beginning of each month, and then add the cash receipts (from customers, issuance of stock, and other operations). Finally, add the cash paid out (purchases made, wage expenses, and other cash outflow). Once you enter those values, the built-in formulas will calculate your cash position for each month with.

‌ Download 12-Month Cash Flow Forecast

3-Year Cash Flow Statement Template Set

Use this cash flow statement template set to analyze the amount of cash your company has compared to its expenses and liabilities. This template set contains a tab to create a monthly cash flow statement, a yearly cash flow statement, and a three-year cash flow statement to track cash flow for the operating, investing, and financing activities of your business.

Download 3-Year Cash Flow Statement Template

For additional information on managing your cash flow, including how to create a cash flow forecast, visit “ Free Cash Flow Statement Templates .”

Balance Sheet Templates for a Business Plan

Use these free balance sheet templates to convey the financial position of your business during a specific time period to potential investors and stakeholders.

Small Business Pro Forma Balance Sheet

Small businesses can use this pro forma balance sheet template to project account balances for assets, liabilities, and equity for a designated period. Established businesses can use this template (and its built-in formulas) to calculate key financial ratios, including working capital.

Download Pro Forma Balance Sheet Template

Monthly and Quarterly Balance Sheet Template

Use this balance sheet template to evaluate your company’s financial health on a monthly, quarterly, and annual basis. You can also use this template to project your financial position for a specified time in the future. Once you complete the balance sheet, you can compare and analyze your assets, liabilities, and equity on a quarter-over-quarter or year-over-year basis.

Download Monthly/Quarterly Balance Sheet Template - Excel

Yearly Balance Sheet Template

Use this balance sheet template to compare your company’s short and long-term assets, liabilities, and equity year-over-year. This template also provides calculations for common financial ratios with built-in formulas, so you can use it to evaluate account balances annually.

Download Yearly Balance Sheet Template - Excel

For more downloadable resources for a wide range of organizations, visit “ Free Balance Sheet Templates .”

Sales Forecast Templates for Business Plan

Sales projections are a fundamental part of a business plan, and should support all other components of your plan, including your market analysis, product offerings, and marketing plan . Use these sales forecast templates to estimate future sales, and ensure the numbers align with the sales numbers provided in your income statement.

Basic Sales Forecast Sample Template

Use this basic forecast template to project the sales of a specific product. Gather historical and industry sales data to generate monthly and yearly estimates of the number of units sold and the price per unit. Then, the pre-built formulas will calculate percentages automatically. You’ll also find details about which months provide the highest sales percentage, and the percentage change in sales month-over-month. 

Download Basic Sales Forecast Sample Template

12-Month Sales Forecast Template for Multiple Products

Use this sales forecast template to project the future sales of a business across multiple products or services over the course of a year. Enter your estimated monthly sales, and the built-in formulas will calculate annual totals. There is also space to record and track year-over-year sales, so you can pinpoint sales trends.

Download 12-Month Sales Forecasting Template for Multiple Products

3-Year Sales Forecast Template for Multiple Products

Use this sales forecast template to estimate the monthly and yearly sales for multiple products over a three-year period. Enter the monthly units sold, unit costs, and unit price. Once you enter those values, built-in formulas will automatically calculate revenue, margin per unit, and gross profit. This template also provides bar charts and line graphs to visually display sales and gross profit year over year.

Download 3-Year Sales Forecast Template - Excel

For a wider selection of resources to project your sales, visit “ Free Sales Forecasting Templates .”

Break-Even Analysis Template for Business Plan

A break-even analysis will help you ascertain the point at which a business, product, or service will become profitable. This analysis uses a calculation to pinpoint the number of service or unit sales you need to make to cover costs and make a profit.

Break-Even Analysis Template

Use this break-even analysis template to calculate the number of sales needed to become profitable. Enter the product's selling price at the top of the template, and then add the fixed and variable costs. Once you enter those values, the built-in formulas will calculate the total variable cost, the contribution margin, and break-even units and sales values.

Download Break-Even Analysis Template

For additional resources, visit, “ Free Financial Planning Templates .”

Business Budget Templates for Business Plan

These business budget templates will help you track costs (e.g., fixed and variable) and expenses (e.g., one-time and recurring) associated with starting and running a business. Having a detailed budget enables you to make sound strategic decisions, and should align with the expense values listed on your income statement.

Startup Budget Template

Use this startup budget template to track estimated and actual costs and expenses for various business categories, including administrative, marketing, labor, and other office costs. There is also room to provide funding estimates from investors, banks, and other sources to get a detailed view of the resources you need to start and operate your business.

Download Startup Budget Template

Small Business Budget Template

This business budget template is ideal for small businesses that want to record estimated revenue and expenditures on a monthly and yearly basis. This customizable template comes with a tab to list income, expenses, and a cash flow recording to track cash transactions and balances.

Download Small Business Budget Template

Professional Business Budget Template

Established organizations will appreciate this customizable business budget template, which  contains a separate tab to track projected business expenses, actual business expenses, variances, and an expense analysis. Once you enter projected and actual expenses, the built-in formulas will automatically calculate expense variances and populate the included visual charts. 

‌ Download Professional Business Budget Template

For additional resources to plan and track your business costs and expenses, visit “ Free Business Budget Templates for Any Company .”

Other Financial Templates for Business Plan

In this section, you’ll find additional financial templates that you may want to include as part of your larger business plan.

Startup Funding Requirements Template

This simple startup funding requirements template is useful for startups and small businesses that require funding to get business off the ground. The numbers generated in this template should align with those in your financial projections, and should detail the allocation of acquired capital to various startup expenses.

Download Startup Funding Requirements Template - Excel

Personnel Plan Template

Use this customizable personnel plan template to map out the current and future staff needed to get — and keep — the business running. This information belongs in the personnel section of a business plan, and details the job title, amount of pay, and hiring timeline for each position. This template calculates the monthly and yearly expenses associated with each role using built-in formulas. Additionally, you can add an organizational chart to provide a visual overview of the company’s structure. 

Download Personnel Plan Template - Excel

Elements of the Financial Section of a Business Plan

Whether your organization is a startup, a small business, or an enterprise, the financial plan is the cornerstone of any business plan. The financial section should demonstrate the feasibility and profitability of your idea and should support all other aspects of the business plan. 

Below, you’ll find a quick overview of the components of a solid financial plan.

• Financial Overview: This section provides a brief summary of the financial section, and includes key takeaways of the financial statements. If you prefer, you can also add a brief description of each statement in the respective statement’s section.
• Key Assumptions: This component details the basis for your financial projections, including tax and interest rates, economic climate, and other critical, underlying factors.
• Break-Even Analysis: This calculation helps establish the selling price of a product or service, and determines when a product or service should become profitable.
• Pro Forma Income Statement: Also known as a profit and loss statement, this section details the sales, cost of sales, profitability, and other vital financial information to stakeholders.
• Pro Forma Cash Flow Statement: This area outlines the projected cash inflows and outflows the business expects to generate from operating, financing, and investing activities during a specific timeframe.
• Pro Forma Balance Sheet: This document conveys how your business plans to manage assets, including receivables and inventory.
• Key Financial Indicators and Ratios: In this section, highlight key financial indicators and ratios extracted from financial statements that bankers, analysts, and investors can use to evaluate the financial health and position of your business.

Need help putting together the rest of your business plan? Check out our free simple business plan templates to get started. You can learn how to write a successful simple business plan  here . 

Visit this  free non-profit business plan template roundup  or download a  fill-in-the-blank business plan template  to make things easy. If you are looking for a business plan template by file type, visit our pages dedicated specifically to  Microsoft Excel ,  Microsoft Word , and  Adobe PDF  business plan templates. Read our articles offering  startup business plan templates  or  free 30-60-90-day business plan templates  to find more tailored options.

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Table of Contents

How to make a business plan

How to make a good business plan: step-by-step guide.

A business plan is a strategic roadmap used to navigate the challenging journey of entrepreneurship. It's the foundation upon which you build a successful business.

A well-crafted business plan can help you define your vision, clarify your goals, and identify potential problems before they arise.

But where do you start? How do you create a business plan that sets you up for success?

This article will explore the step-by-step process of creating a comprehensive business plan.

What is a business plan?

A business plan is a formal document that outlines a business's objectives, strategies, and operational procedures. It typically includes the following information about a company:

Products or services

Target market

Competitors

Marketing and sales strategies

Financial plan

Management team

A business plan serves as a roadmap for a company's success and provides a blueprint for its growth and development. It helps entrepreneurs and business owners organize their ideas, evaluate the feasibility, and identify potential challenges and opportunities.

As well as serving as a guide for business owners, a business plan can attract investors and secure funding. It demonstrates the company's understanding of the market, its ability to generate revenue and profits, and its strategy for managing risks and achieving success.

Business plan vs. business model canvas

A business plan may seem similar to a business model canvas, but each document serves a different purpose.

A business model canvas is a high-level overview that helps entrepreneurs and business owners quickly test and iterate their ideas. It is often a one-page document that briefly outlines the following:

Key partnerships

Key activities

Key propositions

Customer relationships

Customer segments

Key resources

Cost structure

Revenue streams

On the other hand, a Business Plan Template provides a more in-depth analysis of a company's strategy and operations. It is typically a lengthy document and requires significant time and effort to develop.

A business model shouldn’t replace a business plan, and vice versa. Business owners should lay the foundations and visually capture the most important information with a Business Model Canvas Template . Because this is a fast and efficient way to communicate a business idea, a business model canvas is a good starting point before developing a more comprehensive business plan.

A business plan can aim to secure funding from investors or lenders, while a business model canvas communicates a business idea to potential customers or partners.

Why is a business plan important?

A business plan is crucial for any entrepreneur or business owner wanting to increase their chances of success.

Here are some of the many benefits of having a thorough business plan.

Helps to define the business goals and objectives

A business plan encourages you to think critically about your goals and objectives. Doing so lets you clearly understand what you want to achieve and how you plan to get there.

A well-defined set of goals, objectives, and key results also provides a sense of direction and purpose, which helps keep business owners focused and motivated.

Guides decision-making

A business plan requires you to consider different scenarios and potential problems that may arise in your business. This awareness allows you to devise strategies to deal with these issues and avoid pitfalls.

With a clear plan, entrepreneurs can make informed decisions aligning with their overall business goals and objectives. This helps reduce the risk of making costly mistakes and ensures they make decisions with long-term success in mind.

Attracts investors and secures funding

Investors and lenders often require a business plan before considering investing in your business. A document that outlines the company's goals, objectives, and financial forecasts can help instill confidence in potential investors and lenders.

A well-written business plan demonstrates that you have thoroughly thought through your business idea and have a solid plan for success.

Identifies potential challenges and risks

A business plan requires entrepreneurs to consider potential challenges and risks that could impact their business. For example:

Is there enough demand for my product or service?

Will I have enough capital to start my business?

Is the market oversaturated with too many competitors?

What will happen if my marketing strategy is ineffective?

By identifying these potential challenges, entrepreneurs can develop strategies to mitigate risks and overcome challenges. This can reduce the likelihood of costly mistakes and ensure the business is well-positioned to take on any challenges.

Provides a basis for measuring success

A business plan serves as a framework for measuring success by providing clear goals and financial projections . Entrepreneurs can regularly refer to the original business plan as a benchmark to measure progress. By comparing the current business position to initial forecasts, business owners can answer questions such as:

Are we where we want to be at this point?

Did we achieve our goals?

If not, why not, and what do we need to do?

After assessing whether the business is meeting its objectives or falling short, business owners can adjust their strategies as needed.

How to make a business plan step by step

The steps below will guide you through the process of creating a business plan and what key components you need to include.

1. Create an executive summary

Start with a brief overview of your entire plan. The executive summary should cover your business plan's main points and key takeaways.

Keep your executive summary concise and clear with the Executive Summary Template . The simple design helps readers understand the crux of your business plan without reading the entire document.

2. Write your company description

Provide a detailed explanation of your company. Include information on what your company does, the mission statement, and your vision for the future.

Provide additional background information on the history of your company, the founders, and any notable achievements or milestones.

3. Conduct a market analysis

Conduct an in-depth analysis of your industry, competitors, and target market. This is best done with a SWOT analysis to identify your strengths, weaknesses, opportunities, and threats. Next, identify your target market's needs, demographics, and behaviors.

Use the Competitive Analysis Template to brainstorm answers to simple questions like:

What does the current market look like?

Who are your competitors?

What are they offering?

What will give you a competitive advantage?

Who is your target market?

What are they looking for and why?

How will your product or service satisfy a need?

These questions should give you valuable insights into the current market and where your business stands.

4. Describe your products and services

Provide detailed information about your products and services. This includes pricing information, product features, and any unique selling points.

Use the Product/Market Fit Template to explain how your products meet the needs of your target market. Describe what sets them apart from the competition.

5. Design a marketing and sales strategy

Outline how you plan to promote and sell your products. Your marketing strategy and sales strategy should include information about your:

Pricing strategy

Advertising and promotional tactics

Sales channels

The Go to Market Strategy Template is a great way to visually map how you plan to launch your product or service in a new or existing market.

6. Determine budget and financial projections

Document detailed information on your business’ finances. Describe the current financial position of the company and how you expect the finances to play out.

Some details to include in this section are:

Startup costs

Revenue projections

Profit and loss statement

Funding you have received or plan to receive

Strategy for raising funds

7. Set the organization and management structure

Define how your company is structured and who will be responsible for each aspect of the business. Use the Business Organizational Chart Template to visually map the company’s teams, roles, and hierarchy.

As well as the organization and management structure, discuss the legal structure of your business. Clarify whether your business is a corporation, partnership, sole proprietorship, or LLC.

8. Make an action plan

At this point in your business plan, you’ve described what you’re aiming for. But how are you going to get there? The Action Plan Template describes the following steps to move your business plan forward. Outline the next steps you plan to take to bring your business plan to fruition.

Types of business plans

Several types of business plans cater to different purposes and stages of a company's lifecycle. Here are some of the most common types of business plans.

Startup business plan

A startup business plan is typically an entrepreneur's first business plan. This document helps entrepreneurs articulate their business idea when starting a new business.

Not sure how to make a business plan for a startup? It’s pretty similar to a regular business plan, except the primary purpose of a startup business plan is to convince investors to provide funding for the business. A startup business plan also outlines the potential target market, product/service offering, marketing plan, and financial projections.

Strategic business plan

A strategic business plan is a long-term plan that outlines a company's overall strategy, objectives, and tactics. This type of strategic plan focuses on the big picture and helps business owners set goals and priorities and measure progress.

The primary purpose of a strategic business plan is to provide direction and guidance to the company's management team and stakeholders. The plan typically covers a period of three to five years.

Operational business plan

An operational business plan is a detailed document that outlines the day-to-day operations of a business. It focuses on the specific activities and processes required to run the business, such as:

Organizational structure

Staffing plan

Production plan

Quality control

Inventory management

Supply chain

The primary purpose of an operational business plan is to ensure that the business runs efficiently and effectively. It helps business owners manage their resources, track their performance, and identify areas for improvement.

Growth-business plan

A growth-business plan is a strategic plan that outlines how a company plans to expand its business. It helps business owners identify new market opportunities and increase revenue and profitability. The primary purpose of a growth-business plan is to provide a roadmap for the company's expansion and growth.

The 3 Horizons of Growth Template is a great tool to identify new areas of growth. This framework categorizes growth opportunities into three categories: Horizon 1 (core business), Horizon 2 (emerging business), and Horizon 3 (potential business).

One-page business plan

A one-page business plan is a condensed version of a full business plan that focuses on the most critical aspects of a business. It’s a great tool for entrepreneurs who want to quickly communicate their business idea to potential investors, partners, or employees.

A one-page business plan typically includes sections such as business concept, value proposition, revenue streams, and cost structure.

Best practices for how to make a good business plan

Here are some additional tips for creating a business plan:

Use a template

A template can help you organize your thoughts and effectively communicate your business ideas and strategies. Starting with a template can also save you time and effort when formatting your plan.

Miro’s extensive library of customizable templates includes all the necessary sections for a comprehensive business plan. With our templates, you can confidently present your business plans to stakeholders and investors.

Be practical

Avoid overestimating revenue projections or underestimating expenses. Your business plan should be grounded in practical realities like your budget, resources, and capabilities.

Be specific

Provide as much detail as possible in your business plan. A specific plan is easier to execute because it provides clear guidance on what needs to be done and how. Without specific details, your plan may be too broad or vague, making it difficult to know where to start or how to measure success.

Be thorough with your research

Conduct thorough research to fully understand the market, your competitors, and your target audience . By conducting thorough research, you can identify potential risks and challenges your business may face and develop strategies to mitigate them.

Get input from others

It can be easy to become overly focused on your vision and ideas, leading to tunnel vision and a lack of objectivity. By seeking input from others, you can identify potential opportunities you may have overlooked.

Review and revise regularly

A business plan is a living document. You should update it regularly to reflect market, industry, and business changes. Set aside time for regular reviews and revisions to ensure your plan remains relevant and effective.

Create a winning business plan to chart your path to success

Starting or growing a business can be challenging, but it doesn't have to be. Whether you're a seasoned entrepreneur or just starting, a well-written business plan can make or break your business’ success.

The purpose of a business plan is more than just to secure funding and attract investors. It also serves as a roadmap for achieving your business goals and realizing your vision. With the right mindset, tools, and strategies, you can develop a visually appealing, persuasive business plan.

Ready to make an effective business plan that works for you? Check out our library of ready-made strategy and planning templates and chart your path to success.

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Run » finance, concerned about your business's financial health here are 6 methods for measuring profitability.

Track your business’s profitability and overall financial health with these six useful methods.

A business’s financial health is determined by various factors, one of which being the amount of profit generated. That’s why it’s so important for business owners to understand their current, past, and future profitability.

Here’s why profitability matters so much, especially for small businesses, and how you can effectively measure yours.

What is profitability?

Profitability is the ratio between a business’s income and its expenses. A business determines its income by calculating the money the business generates through its operations and activities. A business determines its expenses by calculating the number of resources (money, time, and inventory) consumed during the course of its operations.

Leaders can use this data to determine their business’s profitability through an income statement. An income statement is a report detailing a business’s income and expenses during a particular accounting period.

To measure future profitability, a business may use a pro forma income statement, which measures income and expenses for an upcoming accounting period. Some businesses may generate project income statements to determine the profitability of a particular business change or upcoming business project.

[Read more: How to Calculate Small Business Profit ]

Business managers and owners should keep a close eye on their gross profit margin ratio to ensure it stays stable over time.

Ways to measure profitability

Businesses can measure how profitable they are with a few different types of financial calculations.

Gross profit margin ratio

A gross profit margin ratio is vital information as it analyzes a business’s money flow. To first calculate your gross profit, subtract the cost of goods sold (COGS) from net sales. Next, calculate the gross profit margin ratio by dividing your gross profit by net sales, then multiplying that number by 100.

Business managers and owners should keep a close eye on their gross profit margin ratio to ensure it stays stable over time. The ratio should only fluctuate when pricing policies or the price of goods changes.

Operating profit margin ratio

An operating profit margin ratio illustrates a business’s earning potential from its current operations. You can calculate your operating profit margin ratio by dividing operating income by net sales, then multiplying that number by 100.

A healthy operating profit margin ratio is one that increases from one accounting period to the next. Businesses use this profitability measurement to calculate their competitive position within an industry.

Net profit margin ratio

A net profit margin ratio calculates the amount of profit a business can extract from its total revenue stream. To calculate, divide net income by net sales, then multiply that number by 100 to create a ratio.

Each industry has a different average net profit margin ratio, so business owners should compare their business’s net profit margin ratio to the industry average to assess yearly performance. A net profit margin is different from an operating profit margin ratio because it accounts for earnings after taxes.

Break-even analysis

A break-even analysis involves determining the point at which a business’s revenues equal expenses. To calculate, a business will need to determine its fixed expenses, variable expenses, and sales. A variable expense is an expense that fluctuates based on sales numbers. The break-even point is when sales equal fixed expenses plus variable expenses.

The break-even point can be expressed in either dollar amounts or units sold and is useful in determining how your business will react when sales slump. This method is incredibly valuable when planning for a business’s future.

[Read more: How These Innovation Driven Startups Reached Profitability ]

Return on assets

A return on assets measurement demonstrates the comparison between assets and revenue. The higher the number, the more efficient the business. To calculate your return on assets, divide net income before taxes by total assets, then multiply that number by 100.

Return on investment

Return on investment allows a business owner to determine if the financial benefit of a project or investment is worth the initial and ongoing expenses. If you will ultimately spend more money than you’ll earn, the venture may not be worth it. To determine a business’s return on investment, divide net profit before taxes by net worth.

No matter which metrics you use to determine your overall profitability, it’s essential to be consistent about tracking your business’s financial performance and health. The sooner you can identify potential problems and negative trends, the sooner you can take action to get back on track.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here .

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By Whitney Gillespie     March 9, 2023

What is profitability analysis, & why does it matter.

Profitability analysis is an important and powerful tool for Financial Planning & Analysis (FP&A) professionals looking to drive business results. Such analysis not only shows what business units or product lines within an organization are profitable, but also helps model what-if scenarios – such as how pricing, new products and mix changes would impact customer and line-of-business profitability. In short, profitability analysis generates important data about the performance of business units, product lines, strategic initiatives and more to enable collaboration required for effective decision-making.

Profitability Analysis for Analyzing Business Results and Modeling Future Scenarios

Simply put, profit is defined as revenue minus expenses. Despite being a common area of interest to Finance, revenue is not always the best metric for the health of a product line or business unit. Profitability analysis, however, can help the organization understand what areas are performing well and which may need more attention or need to be reevaluated.

Using profitability analysis not only shows how these areas are performing today and how they have historically performed, but also models strategies for the future. Profitability analysis can model what-if scenarios to determine how price changes, new products and mix changes could impact customer and line-of-business profitability. The impact these changes have on the P&L, balance sheet and cash flow statements can be modeled and reviewed across the organization. By pairing profitability analysis with powerful reporting and analytics capabilities, Finance can quickly monitor dashboards and easily share results of the analysis with key stakeholders to make better-informed decisions and adjust strategies ahead of month-end close when results impact the financials.

Profitability Analysis for Better Financial Results

Understanding what business units, product lines, and initiatives within an organization are profitable and which are struggling is key to efficiently and effectively allocating resources across the organization.

By analyzing the profitability of different product lines or business segments, for example, FP&A teams can determine which products and services are most profitable, leading to better resource allocation to continue to drive profit in areas generating it while helping areas that are lagging. Additionally, profitability analysis can help identify cost-saving opportunities by identifying where to reduce expenses or when to negotiate better terms with suppliers.

Analyzing which areas constitute the top 80% of profitability performance (Figure 1) can help an organization better understand the drivers in the business and then allocate resources accordingly.

Profitability Analysis for Aligning Strategic Initiatives and Enterprise Goals with Profitability Results

In addition to showing which product lines and business units are performing – and where efforts are falling below expectations – profitability analysis can help FP&A teams understand the performance of strategic initiatives. For example, the results of a new marketing initiative can be analyzed using profitability analysis to understand what's working and what's not. Finance can then make adjustments to improve performance.

Additionally, profitability analysis can be used in the planning, budgeting and forecasting cycles by helping to identify the key drivers that forecast future financial performance. By analyzing past trends and identifying the drivers of profitability (Figure 2), Finance can more accurately forecast revenues, costs and profits.

By improving forecast accuracy and focusing efforts in the right areas, Finance provides a better guide for long-term planning and decision-making within an organization.

Profitability analysis is also an important tool for measuring a company's overall financial health. A business unit or product line showing increased revenue does not always indicate increased profitability. By analyzing key financial metrics such as gross margin, operating margin and return on investment (ROI), Finance can determine the overall profitability of business segments, product lines and initiative across an organization. These metrics can also be used to benchmark the company's performance against competitors, providing valuable insights into the company's market position.

By analyzing profitability, Finance can identify which areas of the business are performing well and which areas need improvement. Additionally, profitability analysis can help evaluate the effectiveness of different strategies and tactics, forecast future financial performance and measure a company's overall financial health. Ultimately, then, profitability analysis matters because it identifies what segments of the business and product lines are actually profitable, not just generating revenue.

Want to learn more about OneStream's profitability analysis offerings? Check out our solution brief about Conquering Complexity in Profitability Analysis .

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Related Resources

7 Steps to Successful Profitability Analysis

The only collaborative  FP&A budgeting software that aligns and engages your entire company.

When a company is losing money, the focus is on how to reverse that trend. When your revenue exceeds your expenses, however, an organization may be in less of a hurry to break that information down - which is where profitability analysis comes into play.The truth is, while you may be turning a profit, you may not be making as much as you could be. When profit is only viewed as a binary – yes, we’re making more than we’re spending or no, we’re not – the real story may be masked by simplicity. For instance, what if you have one product or service that is wildly profitable, and another that is losing money?Gaining a greater understanding of your profitability requires more analysis than a financial statement and a balance sheet. By doing a profitability analysis, companies can identify areas in need of attention. We’ve compiled 8 things that you should do and those you should avoid as you prepare a profitability analysis.

One: Do (at least) 3

There are 3 key analyses that you can do to help determine profitability. Don’t be tempted to stop at only one or two of them. Each of them provides a different view of your situation.

Gross Profit Margin:

Your gross profit margin is the amount of your sales revenue minus the cost of your goods. In conjunction with your other numbers, your gross profit margin can tell you if your products are profitable enough, if you need to increase sales or if your expenses, like sales costs, are too high.

Net Profit Margin:

A little more complicated than your Gross Profit Margin, the Net Profit Margin is sometimes simply called the profit margin. To get this number, subtract your expenses from your revenues to get your net profit. Then divide that by your revenue. This will give you a 10,000 foot view of your overall profitability.

Segment Profit:

Few businesses have only one product or service. It’s important to understand the profit for each of your lines of business or products. You can calculate this either by taking the revenue for the segments and subtracting the associated costs or can include a portion of overhead costs – like rent, utilities, salaries, etc. – into the calculation.

Two: Now Do Them for The Past

Once you’ve done those calculations for your current numbers, go back and do them for quarters or years past. By comparing your current numbers by your past performance, you’ll know if you’re moving in the right – and more profitable – direction and be able to pinpoint areas that need attention.

Three: Benchmark Industry Profitability Ratios

Your profit margin might look weak to you, but is it? Different industries have different levels of profitability. Real estate, health care, and financial services tend to have high profit margins. Other industries, like autos, and grocery, have margins that are much lower. Benchmark your industry before looking at your profitability so you know what to aim for.

Four: Understand Customer Valuation

Your customers are the source of your revenue – and your profits. But how much are they really worth? Are you spending like crazy to acquire new customers? Are your service customers better at producing profits than your products? Obviously, this data must be taken in context with the rest of the business. A low valuation customer who typically later purchases high margin items is a good investment. But you need to understand which is which before you can make smart strategy  of your revenue. Does that make those customers the most valuable? It’s best to look closely at the value of each customer. While some may bring you the majority of your profits, they may not be profitable. That 20 percent could be the ones with the biggest discounts or those that purchase the lowest margin services or products.

Five: Don’t be Held Back by Tools

To be effective, profitability analysis should be done regularly. It can be difficult to do, though, when you use a tool that has high overhead to performing calculations, like spreadsheets. A tool built for enabling fast calculations and pulling in a lot of data can make the difference between performing these analyses often enough to help, or infrequently enough that they mean little to decision making.

Six: Free Up Time for Deeper Analysis

This is another area where the right tool can make all the difference. Tools that remove tedious data entry and model management free up time for more in-depth analysis. For instance, in the interest of time, many finance leaders turn to apportioning as a tool for cost allocation. Apportionment doesn’t give the full picture, however. Driver-based cost allocation results in a more accurate analysis but takes more time. When you alleviate manual tasks with the right tools, you have time to invest in deep analysis.

Seven: Don’t Stop at Insights

The results of these analyses can, and will, provide much deeper insights for the organization to understand what your profitability looks like. Your analysis shouldn’t stop there. Instead, the results should drive finance teams to ask better questions and use data to help find the answers. ‍

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How to perform a profitability analysis of your company

What is profitability analysis used for.

Profitability analysis is an analytical tool for determining a company's ability to generate profit. A profitability analysis examines a company from multiple perspectives, including how much profit it earns per sale or how many sales it needs to break even. Thankfully, most of this information is easily accessible on a company's financial statements. 

What is profitability analysis?

The basic function of every business is to generate profits. So as a business owner or manager, you must assess whether your enterprise is profitable. The process of doing so is 'profitability analysis.' 

A profitability analysis involves tracking your company's performance, determining the break-even sales volume and revenue, and creating 'what if scenarios. This information helps you better understand how your company works and under what conditions it generates the most profit. 

Knowing this information lets, you make more informed decisions as a business owner or manager. You'll have a holistic perspective of your business. 

Why is profitability analysis critical? 

Profitability analysis is essential because it helps you evaluate and track your company's performance. Specifically, profitability analysis lets you do the following:

• Analyze sales data to identify the most and least profitable products and services. 
• Evaluate performance over time by comparing current data with historical data. 
• Compare your company's performance with competitors in the same industry. 

You can combine this information to produce a holistic understanding of your company's profitability. 

What are the two types of profitability analysis?

There are two types of performing profitability analysis: ratio analysis and break-even analysis. Each approach uses a different method and each approach has their own profitability ratios. Ideally, you want to use both to conduct a thorough profitability analysis. 

Ratio analysis

Ratio analysis involves comparing two metrics, like profit vs. cost. Ratio analysis expresses a company's performance in how much return they gain from what they invest. 

Companies use ratio analysis to understand the percentage of profit they make on sales, how much return they receive on investments, and how well they utilize their assets. There are two types of ratio analysis: margin ratios and return ratios. 

Margin ratios indicate how well businesses produce profits from a product or service. Return ratios inform how efficiently a company manages its internal resources and produces returns for its shareholders. 

The four types of margin ratios

1. gross profit margin .

The gross profit margin ratio expresses the percentage of revenue that businesses retain as profit. Naturally, companies want a large gross profit margin since it means they manage production costs better. 

Businesses calculate gross profit margin by subtracting costs from revenue to obtain profit. Next, they divide gross profit by revenue. 

Gross Profit Margin=Gross Profit/Sales

For example, if a business's total revenue is $100 and its total costs are $40, its gross profit is $60. Dividing $60 by $100 gives us 0.6 or 60% of their gross profit margin. This gross profit margin means they keep 60% of their revenue as profit. 

Gross profit margin is important because it looks at your company's inflows and outflows. You need a high gross profit margin to cover your cost of goods sold. You also want a stable gross profit margin. 

A fluctuating gross profit margin highlights instability. Ideally, you only want it to change because of a change in pricing or other company policies. 

2. Operating profit/Earnings before interest and taxes (EBIT) margin

The operating profit margin of businesses reveals how much profit they retain after paying operational expenses but before paying interest and taxes. You'll calculate your operating profit margin by dividing your earnings before interest and taxes by revenue. 

Operating profit margin=Earnings Before Interest and Taxes (EBIT)/ Sales 

Let's say a company's EBIT is $40, and its revenue is $100. This information means their operating profit margin is $40/$100=0.4 or 40%

The operating profit margin indicates the quality of management and operating efficiency of a business. You can also compare your operating profit margin with competitors since similar businesses have similar operating profit margins. Some financial analysts consider operating profit margin to be a more objective measurement of a company's performance since it analyzes pre-tax incomes, unlike net profit margin. 

3. Net profit margin

Net profit margin reveals the percentage of revenue retained as profit after paying both operating expenses, taxes, and interest. It's the most commonly used profitability ratio since it reveals how much money is left after costs. 

Businesses calculate net profit margin by dividing net income by revenue. 

Net Profit Margin=Net Income/Revenue 

For example, a business may have $50 in net income and $100 in revenue. Their net profit margin would be $50/$100=0.5 or 50%. 

A higher net profit margin means a business retains a larger percentage of its revenue as profit.

4. Cash flow margin

Cash flow margin expresses what percentage of revenue is liquid. All businesses need cash to pay operating expenses, pay dividends to shareholders, and invest in new assets. 

Businesses calculate cash flow margin by dividing the amount of cash they earn by their net revenue. 

Cash flow margin=Cash flow / net revenue

For example, a company's cash flow could be $100 and net revenue $750. This gives a cash flow margin of $100/$750=0.75 or 75%, which means the company is highly liquid.

A high cash flow margin means that businesses have more liquidity. Higher liquidity is beneficial since it means a business can better handle sales disruptions and pay costs. 

The three types of return ratios

1. return on investment(roi).

Return on investment (ROI) measures the percentage of profit earned from a financial investment. ROI can be broadly used for different types of investments, including in stocks, business assets, and other securities. 

Businesses and investors calculate ROI by dividing the profit gained from an investment by its investment expense. 

Return on investment=profit from investment/Investment expense

For example, a business could invest $1,000 in a new manufacturing unit. The profit they earn from the unit in a year is $500. Hence the ROI is $500/$1,000= 0.5 or 50%. 

A higher ROI means an investment will yield higher profits relative to the amount invested. But it does not represent the absolute gain from an investment. Suppose in the above example, the business instead invested $2,000 in marketing and gained $800 in profit, giving an ROI of 40%. 

Although their ROI from marketing is less than that of a new manufacturing unit, the company earns more money from marketing because it invested a larger amount in marketing. 

2. Return on equity (ROE)

Return on equity (ROE) informs how much profit a business generates for its shareholders. Investors prioritize this ratio since it tells them what return to expect from an investment. 

Investors calculate ROE by dividing net income by shareholder equity. 

Return on equity= Net Income/Shareholder's equity

For example, a company could have $100 in net income and shareholder equity of $200. Their ROE would be $100/$200=0.5 or 50%. 

Investors want investments to have as high an ROE as possible. 

Check out the difference between ROI and ROE

3. Cash Return on Assets (ROA)

Return on assets (ROA) measures the percentage of return a business produces from existing assets. A company's ROA indicates the efficiency of its internal resource allocation.

Businesses calculate ROA by dividing their cash flow by the value of the assets. 

Cash Return on Assets=Cash Flow From Operating Activities/ Total Assets 

For example, a business could have $100 in cash flow from operating activities and $300 in total assets. Their ROA would be $100/$300=0.3 or 30%. 

What constitutes a good ROA depends on the industry. But generally, an ROA of 5% is considered good, and one above 20% is considered excellent. 

Break-even analysis

A break-even analysis identifies a company's 'break-even point,' the level at which its revenue equals its costs. Before reaching its break-even point, a company is in the red, meaning its costs exceed its revenue. After passing the break-even point, they're in the black. Their revenue exceeds their costs. 

All points after the break-even point generate profit. So knowing a company's break-even point reveals at what level of sales it can become profitable. Break-even point analysis simplifies the relationship between costs, revenue, and sales volume. 

If you're currently profitable, a break-even analysis reveals the minimum sales volume needed to stay viable. If you're not profitable, a break-even analysis tells you how much you need to sell and at what price to become profitable. 

Contribution margin

A product's contribution margin reveals the difference between its price and total variable cost. This ratio is specific to a product or service rather than a whole company. 

Businesses calculate contribution margin by subtracting a product's price and variable cost per unit. 

Contribution Margin=Price of product - Total variable cost per unit

For example, a product's revenue could be $100, its total fixed costs could be $20, and its total variable costs are $60. its contribution margin would be $100 - $60 =$40. This $40 is the revenue used to cover the remaining fixed costs, which are excluded from the contribution margin calculation. 

How to perform a break-even analysis 

You can perform a break-even analysis by calculating the break-even volume, revenue, or both. 

1. Break-even sales volume

You'll calculate break-even sales volume by dividing total fixed costs by a product's contribution margin. Suppose a product's fixed costs are $3,000, its contribution margin is $60, and the break-even volume is 500 since 500 units * $60 = $3,000. 

Break-even sales volume=total fixed costs/contribution margin .

Selling 500 units of this product generates exactly enough revenue for a company to pay its fixed cost of $3,000. The company breaks even at the 500 sales point since it doesn't generate any profit. 

2. Break-even revenue

Calculating break-even revenue consists of dividing total fixed costs by the contribution margin. Remember, the contribution margin ratio is the contribution margin per unit divided by price. 

Break-even revenue= Total fixed costs/ contribution margin 

Suppose a company's contribution margin ratio is $40/$100= 0.4 or 40%. And their total fixed costs are $3,000. Their contribution margin ratio would be $3,000/ 0.4 = $7,500.

You can confirm this figure by calculating total revenue by multiplying the break-even volume (500) with the price ($100), which gives $50,000. These examples show you can calculate break-even volume if you have break-even income and vice versa.

How do I perform a profitability analysis? 

The best way to analyze a company's profitability is with as much financial data as possible. You want access to all the company's financial statements, including their balance sheet, income sheet, and statement of cash flows. You'll use this information to holistically analyze the company. 

You also want access to the company's historical data to see trends in its performance. You can also compare your company's historical data with competitors since they'll likely have similar data. 

Use the following three-step approach to holistically analyze a company's profitability: 

Step 1: Perform a break-even analysis 

Calculate the break-even revenue and volume. Then subject the break-even analysis to 'what if' planning. Such as, what if the company's total variable cost increases? What if the total revenue decreases? What if the price increases?

Doing so identifies at what points a company no longer breaks even. The business can then take steps to avoid this problem. For example, your break-even analysis may reveal that your company can't break even if your price falls below $50 per unit. You'll then design your pricing to be at least $50 per unit. 

Step 2: Ratio analysis 

Calculate the profit and return ratios using the above formulas and graph this information over time. The trends will reveal the company's historical performance. You'll also want to correlate trends like increasing orders and an increased profit margin ratio.

The above information indicates the company has entered economies of scale and performs disproportionately better with a high sales volume. This information further means that you want the company to prioritize increasing sales. 

Step 3: Compare your data with competitors

Compare your break-even analysis and ratio analysis with competitors in the same industry. Doing so contextualizes your company's performance within the industry. Each industry has its norms, so only compare with similar companies. 

For instance, your business could have a historically stable ROE of 4%. You might find this statistic low in absolute terms. But the industry average is 2%, in which case your company performs better than average. Having finished this article, you should know how to use financial data to perform profitability analysis.

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Profitability Ratios Demystified: A Complete Guide

Profitability ratios are key indicators that can make or break a business. When it comes to financial analysis, understanding these ratios is essential for making informed decisions. Profitability Ratios Demystified: A Complete Guide offers a comprehensive breakdown of these ratios, providing valuable insights to help businesses thrive.

This guide not only equips readers with a deep understanding of profitability ratios but also explores their historical significance. By delving into the origins of these ratios, readers gain a broader perspective on their evolution and relevance in today’s business landscape. From examining return on investment to exploring profit margins, this guide presents practical solutions that can be applied to enhance business profitability. With Profitability Ratios Demystified: A Complete Guide, businesses can unlock their full potential and achieve long-term success.

The Significance of Profitability Ratios

Profitability ratios are financial metrics that analyze a company’s ability to generate profits relative to its revenue, assets, and equity. These ratios are essential tools for evaluating a company’s financial health, profitability, and overall performance. Investors, creditors, and stakeholders often rely on profitability ratios to assess a company’s ability to generate returns and manage its resources efficiently. By understanding profitability ratios, you can gain valuable insights into a company’s earning potential, cost management, and competitive position in the market.

There are various profitability ratios, each focusing on different aspects of a company’s financial performance. These ratios provide essential information about a company’s profitability, including its profit margins, return on investment , and return on equity. By analyzing these ratios, stakeholders can make informed decisions about investing , lending, or partnering with a company. Whether you’re interested in assessing the profitability of a potential investment opportunity or evaluating your own company’s financial performance, understanding profitability ratios is crucial.

Profitability ratios can be used by individuals and organizations from various backgrounds and industries. Small business owners can utilize these ratios to assess their company’s profitability and identify areas for improvement. Investors can evaluate the profitability of different companies and industries to make informed investment decisions. Financial analysts can use profitability ratios to compare companies within the same industry and identify trends or outliers. Regardless of your role or industry, profitability ratios offer valuable insights into a company’s financial health and performance.

The Different Types of Profitability Ratios

There are several types of profitability ratios, each focusing on different aspects of a company’s financial performance. Let’s explore some of the most common types of profitability ratios:

Gross Profit Margin

The gross profit margin measures a company’s profitability after accounting for the direct costs associated with producing goods or services. It indicates the percentage of revenue that remains after deducting the cost of goods sold. A higher gross profit margin indicates greater profitability as it indicates the company can sell its products at a higher price compared to the cost of production.

The formula for calculating the gross profit margin is:

Gross Profit Margin = (Revenue – Cost of Goods Sold) / Revenue

Net Profit Margin

The net profit margin measures a company’s profitability after deducting all expenses, including operating costs, taxes, interest, and any other costs incurred. It indicates the percentage of revenue that remains as profit after accounting for all expenses. A higher net profit margin indicates stronger profitability as it shows the company’s ability to generate income and effectively manage its costs.

The formula for calculating the net profit margin is:

Net Profit Margin = Net Profit / Revenue

Return on Assets (ROA)

The return on assets (ROA) ratio measures how efficiently a company utilizes its assets to generate profits. It assesses the company’s ability to generate earnings from its assets, including both tangible and intangible assets. A higher ROA indicates that a company is effectively utilizing its resources to generate profits.

The formula for calculating the return on assets is:

Return on Assets (ROA) = Net Profit / Total Assets

Return on Equity (ROE)

The return on equity (ROE) ratio measures the return generated for shareholders’ investments. It highlights the company’s ability to generate profits relative to the shareholders’ equity invested in the business. A higher ROE indicates that the company is efficiently utilizing shareholders’ investments to generate higher returns.

The formula for calculating the return on equity is:

Return on Equity (ROE) = Net Profit / Shareholders’ Equity

Operating Profit Margin

The operating profit margin measures a company’s profitability from its core operations, excluding interest and taxes. It highlights the company’s ability to generate profits solely from its regular business activities. A higher operating profit margin indicates stronger profitability from the core operations of the company.

The formula for calculating the operating profit margin is:

Operating Profit Margin = Operating Profit / Revenue

Earnings Per Share (EPS)

The earnings per share (EPS) ratio measures the profitability earned per outstanding share of common stock. It is particularly relevant to shareholders as it indicates the amount of profit allocated to each share. A higher EPS indicates stronger profitability and is often considered a positive sign by investors.

The formula for calculating the earnings per share is:

Earnings Per Share (EPS) = Net Profit / Number of Outstanding Shares

Price-to-Earnings (P/E) Ratio

The price-to-earnings (P/E) ratio compares a company’s current stock price to its earnings per share. It provides insights into the market’s expectations for a company’s future earnings and relative valuation. A higher P/E ratio may indicate that investors have high expectations for future earnings growth.

The formula for calculating the price-to-earnings ratio is:

Price-to-Earnings (P/E) Ratio = Stock Price / Earnings Per Share

The Benefits of Understanding Profitability Ratios

Understanding profitability ratios offers numerous benefits for individuals, businesses, and investors. By analyzing profitability ratios, you can:

• Gain insights into a company’s financial health and stability
• Evaluate the profitability of potential investments
• Assess the efficiency of a company’s operations and resource utilization
• Identify areas for cost reduction and improvement
• Compare and benchmark the performance of different companies
• Make informed decisions based on financial analysis

By leveraging profitability ratios, you can make smarter financial decisions and have a deeper understanding of a company’s performance and potential. Whether you’re an investor, business owner, or financial professional, the knowledge of profitability ratios can significantly enhance your financial analysis capabilities.

Profitability Ratios in Action: Case Studies

In this section, we will dive into two real-world case studies to showcase the practical applications of profitability ratios. By examining these case studies, you will gain a holistic understanding of how profitability ratios can be used to evaluate and compare companies in different industries.

Case Study 1: Retail Giants – Walmart vs. Target

Let’s examine the profitability ratios of two major retail giants, Walmart and Target, to understand the differences in their financial performance:

Gross Profit Margin:

Walmart: 25% Target: 30% Target has a higher gross profit margin, indicating that it is more efficient in generating profits from its sales.

Net Profit Margin:

Walmart: 2.5% Target: 3.5% Target again outperforms Walmart with a higher net profit margin, implying that it has better control over its expenses and generates more profit for each dollar of revenue.

Return on Assets (ROA):

Walmart: 8% Target: 10% Target has a higher ROA, suggesting that it generates more profit from its assets compared to Walmart.

Return on Equity (ROE):

Walmart: 18% Target: 20% Target also has a higher ROE, indicating that it generates more profit relative to the shareholders’ equity invested.

By analyzing these profitability ratios, we can conclude that while both companies are profitable, Target demonstrates stronger financial performance compared to Walmart. Target has higher profit margins and better returns on assets and equity, indicating efficient resource utilization and cost management.

Case Study 2: Tech Titans – Apple vs. Microsoft

Now, let’s compare the profitability ratios of two technology giants, Apple and Microsoft, to gain insights into their financial performance:

Apple: 40% Microsoft: 70% Microsoft’s significantly higher gross profit margin suggests that it generates greater profits from its products compared to Apple.

Apple: 22% Microsoft: 35% Microsoft leads once again with a higher net profit margin, indicating that it is more efficient in generating profits relative to its revenue.

Apple: 20% Microsoft: 15% Apple has a higher ROA, suggesting that it generates more profit from its assets compared to Microsoft.

Although Microsoft has higher profit margins, Apple outperforms in terms of return on assets. Both companies are profitable, but their profitability ratios reveal slight differences in financial performance. These nuances can provide valuable insights for investors considering investing in these companies.

Demystifying Profitability Ratios in Your Financial Analysis

Profitability ratios are powerful tools that enable individuals and organizations to assess a company’s financial performance, profitability, and efficiency. By understanding the significance and applications of profitability ratios, you can make more informed decisions as an investor, creditor, or business owner. Whether you’re analyzing financial statements , comparing companies, or evaluating potential investments, profitability ratios will provide you with valuable insights into a company’s profitability, sustainability, and overall financial health.

Remember, profitability ratios are just one aspect of comprehensive financial analysis. They should be used in conjunction with other financial metrics and qualitative factors to obtain a holistic understanding of a company’s performance. By continually learning and applying financial analysis techniques, you can become a more informed and confident individual in the world of finance.

So, go ahead and start incorporating profitability ratios into your financial analysis process. Unlock the mysteries behind numbers, demystify profitability ratios, and uncover the secrets of financial success!

Statistics: Did you know that companies with higher profitability ratios tend to attract more investors and have higher stock prices in the market? This emphasizes the importance of profitability ratios in evaluating a company’s financial performance.

Key Takeaways – Profitability Ratios Demystified: A Complete Guide

• Profitability ratios help measure a company’s ability to generate profits.
• Key profitability ratios include gross profit margin, operating profit margin, and net profit margin.
• Gross profit margin measures the percentage of revenue left after deducting the cost of goods sold.
• Operating profit margin measures the percentage of revenue remaining after subtracting operating expenses.
• Net profit margin reflects the percentage of revenue remaining after deducting all expenses, including taxes and interest.

Frequently Asked Questions

Are you looking to understand profitability ratios better? Look no further! In this complete guide, we demystify profitability ratios and provide all the information you need to analyze a company’s financial performance. Read on to find answers to some commonly asked questions about profitability ratios.

1. What are profitability ratios and why are they important?

Profitability ratios are financial metrics used to assess a company’s ability to generate profit relative to its expenses and other costs. These ratios provide insights on a company’s profitability, efficiency, and overall financial health. They are essential for investors, creditors, and managers as they help determine the company’s financial viability, growth potential, and ability to meet obligations.

There are various profitability ratios, such as gross profit margin, net profit margin, return on assets (ROA), and return on equity (ROE) . Each ratio focuses on different aspects of profitability, allowing stakeholders to gain a comprehensive understanding of a company’s performance.

2. How do you calculate gross profit margin and what does it indicate?

Gross profit margin measures the percentage of revenue that remains after deducting the cost of goods sold (COGS). To calculate gross profit margin, subtract the COGS from the total revenue and divide the result by the total revenue. The higher the gross profit margin, the more efficient the company is in generating profit from its core operations.

Gross profit margin indicates how well a company controls its production costs. A higher margin suggests that the company can command higher prices for its goods or services, effectively managing its production and operating expenses. Investors often use the gross profit margin to compare companies within the same industry to gauge their relative profitability and efficiency.

3. What is the difference between net profit margin and gross profit margin?

The net profit margin is a profitability ratio that measures the percentage of revenue that remains as net income after accounting for all expenses, including COGS, operating expenses, taxes, and interest. It is calculated by dividing net income by total revenue. While the gross profit margin focuses only on production-related costs, the net profit margin provides a broader picture of a company’s overall profitability.

Net profit margin takes into account all expenses incurred by a company and reflects its ability to generate profit after all costs are deducted. It indicates the company’s efficiency in managing operating expenses, taxes, and interest payments. A higher net profit margin suggests better cost control, higher operational efficiency, and a stronger bottom line.

4. How is return on assets (ROA) calculated and what does it measure?

Return on assets (ROA) is a profitability ratio that assesses how effectively a company utilizes its assets to generate profit. It is calculated by dividing the net income by the average total assets. ROA measures the company’s ability to generate profits from its investments in assets such as buildings, equipment, and inventory.

ROA indicates how efficiently a company utilizes its resources to generate earnings. A higher ROA suggests a more efficient use of assets, indicating better profitability and potential for growth. It helps investors and managers compare the performance of companies within the same industry or track a company’s performance over time.

5. What does return on equity (ROE) signify and how is it calculated?

Return on equity (ROE) is a profitability ratio that measures how much profit a company generates from the money invested by its shareholders. It is calculated by dividing net income by shareholders’ equity. ROE indicates how effectively a company uses its equity to generate profit.

ROE reflects the company’s ability to generate returns for its shareholders and shows their investment’s profitability. A higher ROE indicates efficient use of shareholders’ funds and signifies that the company provides better returns. Investors often use ROE to assess a company’s financial performance and compare it to its competitors or industry standards.

The article discussed the importance of adhering to the criteria for a succinct wrap-up. It emphasized using third-person point of view and a professional tone suitable for a 13-year-old reader. The language should be simple and jargon-free, with concise sentences presenting single ideas. The key objective is to provide a clear understanding of the article’s main points in just two paragraphs.

By following these guidelines, the writer can effectively summarize the article’s content and leave the reader with a comprehensive grasp of the key ideas.

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How to Perform Profitability Analysis in Excel

Profitability analysis is a crucial aspect of any business operation. It provides insight into how well a business is performing and helps to identify areas that require improvement. In this article, we will discuss how to perform profitability analysis in Excel. We will cover the key financial ratios, setting up your spreadsheet for easy analysis, calculating key profitability ratios, analyzing profitability trends, and much more.

Table of Contents

Understanding Profitability Analysis

Profitability analysis is an essential tool for businesses to evaluate their financial health. It involves assessing a business’s ability to generate profits by comparing revenues and expenses. This analysis is performed through financial ratio analysis that provides insight into a business’s financial viability.

Profitability analysis helps businesses to identify areas that require improvement, make informed decisions, and improve business performance. By analyzing the profitability of a business, it can identify the areas where it is excelling and the areas that require improvement. It can help businesses to identify the most profitable products, services, and customers.

Moreover, profitability analysis can help businesses to make informed decisions about pricing, marketing, and investment. It provides key insights that can help businesses to optimize their financial strategies and improve their bottom line.

Importance of Profitability Analysis

Profitability analysis is crucial to ensure a business’s financial stability. It helps to measure the effectiveness of financial strategies, evaluate business performance, and identify trends that can affect the profitability of the business. Accurate profitability analysis provides key insights that can help businesses to make informed decisions that can improve their bottom line.

Without profitability analysis, businesses may make decisions based on incomplete or inaccurate information, which can lead to financial instability and failure. Therefore, profitability analysis is essential for businesses to ensure their long-term financial health and success.

Key Financial Ratios for Profitability Analysis

There are several key financial ratios that are commonly used in profitability analysis. These ratios provide insight into a business’s financial performance and help to identify areas that require improvement.

The Gross Profit Margin is a ratio that measures the profitability of a business by comparing the gross profit to the revenue. The Operating Profit Margin measures the profitability of a business by comparing the operating profit to the revenue. The Net Profit Margin measures the profitability of a business by comparing the net profit to the revenue.

The Return on Assets (ROA) measures the profitability of a business by comparing the net income to the total assets. The Return on Equity (ROE) measures the profitability of a business by comparing the net income to the equity.

These ratios are essential for profitability analysis as they provide key insights into a business’s financial performance. By analyzing these ratios, businesses can identify areas that require improvement and make informed decisions to optimize their financial strategies.

Setting Up Your Excel Spreadsheet

Performing profitability analysis in Excel can help you make informed business decisions. However, setting up your spreadsheet can be a daunting task. Here are some tips to help you get started.

Organizing Your Financial Data

The first step in setting up your Excel spreadsheet is to organize your financial data. This involves collecting data from various financial reports, such as income statements, balance sheets, and cash flow statements. Your data must include revenue, expenses, assets, and liabilities of the business. You can create a top-down or bottom-up approach to collect data based on your preference.

It is essential to ensure that your data is accurate and complete. Any errors or omissions can affect the accuracy of your profitability analysis. You can use accounting software to help you collect and organize your financial data.

Formatting Your Spreadsheet for Easy Analysis

Once your data has been collected, you can begin formatting your Excel spreadsheet for easy analysis. This involves setting up columns and rows, formatting cells, and using colors to clearly differentiate data and improve readability.

You can use the following tips to format your spreadsheet:

• Use bold and italic font styles to highlight important data.
• Use different colors for revenue and expenses to make them stand out.
• Use conditional formatting to highlight cells that meet specific criteria.
• Use data validation to ensure that data is entered correctly.
• Use formulas and functions to perform calculations and analysis.

You can also use graphs and charts to help present your data visually. This can help you identify trends and patterns that may not be apparent in the raw data.

By organizing your financial data and formatting your Excel spreadsheet for easy analysis, you can perform profitability analysis efficiently and effectively. This can help you make informed business decisions and improve your bottom line.

Calculating Key Profitability Ratios

After setting up your excel sheet, the next step is to calculate key profitability ratios. These ratios provide insight into a business’s financial viability by analyzing revenue and expense figures.

Calculating profitability ratios is essential for any business owner who wants to understand the financial health of their company. These ratios help to identify areas where a business is performing well and areas that need improvement.

Gross Profit Margin

The Gross Profit Margin ratio measures the percentage of revenue left over after the cost of goods sold (COGS) is subtracted. The formula used to calculate the Gross Profit Margin is:

Gross Profit Margin = (Revenue – Cost of Goods Sold) / Revenue

A high Gross Profit Margin indicates that a company is generating a significant profit on each product sold. This can be achieved by either increasing revenue or decreasing the cost of goods sold.

Operating Profit Margin

The Operating Profit Margin ratio measures the percentage of revenue that is left after all operating expenses are subtracted. The formula used to calculate the Operating Profit Margin is:

Operating Profit Margin = Operating Income / Revenue

A high Operating Profit Margin indicates that a company is generating a profit from its core business operations. This ratio is important because it shows how efficient a company is at managing its costs.

Net Profit Margin

Net Profit Margin is the percentage of revenue that is left after all expenses have been deducted. This includes operating expenses, taxes, and interest expenses. The formula used to calculate the Net Profit Margin is:

Net Profit Margin = Net Income / Revenue

A high Net Profit Margin indicates that a company is generating a significant profit after all expenses have been taken into account. This ratio is important because it shows how well a company is managing its expenses.

Return on Assets (ROA)

The Return on Assets (ROA) ratio measures how effectively a business is using its assets to generate profits. The formula used to calculate the ROA is:

ROA = Net Income / Total Assets

A high ROA indicates that a company is generating a significant profit from its assets. This ratio is important because it shows how well a company is using its resources to generate profits.

Return on Equity (ROE)

The Return on Equity (ROE) ratio measures how effectively a business is using its equity to generate profits. The formula used to calculate the ROE is:

ROE = Net Income / Shareholder’s Equity

A high ROE indicates that a company is generating a significant profit from its equity. This ratio is important because it shows how well a company is using its shareholder’s investment to generate profits.

Overall, calculating these key profitability ratios is essential for any business owner who wants to understand the financial health of their company. By analyzing these ratios, business owners can identify areas that need improvement and make informed decisions about how to increase profitability.

Analyzing Profitability Trends

Once you have calculated the key profitability ratios, the next step is to analyze profitability trends. This involves identifying patterns in profitability ratios, comparing your business to industry benchmarks, and assessing the impact of business decisions on profitability.

Profitability is a critical aspect of any business. It is what ultimately determines the success or failure of a business. Therefore, it is essential to analyze profitability trends to ensure continued business growth and success.

Identifying Patterns in Profitability Ratios

Identifying patterns in profitability ratios involves comparing the ratios over a period of time. This helps to identify trends and patterns that can indicate opportunities for improvement or potential problems. Analyzing trends in key profitability ratios can help businesses to adjust their strategies and avoid potential problems before they occur.

For instance, if a business notices a decline in its net profit margin over a period of time, it could be an indication of declining sales or increasing costs. By identifying this trend early, the business can take corrective measures such as reducing costs, increasing sales, or adjusting pricing to improve profitability.

Comparing Your Business to Industry Benchmarks

Comparing your business to industry benchmarks involves analyzing your ratios in comparison to your competitors. This helps you to determine how well your business is performing compared to the industry average and identify areas that require improvement. Benchmarking allows businesses to identify and adopt best practices, improving business performance and profitability.

For example, if a business’s return on assets (ROA) is lower than the industry average, it could indicate that the business is not utilizing its assets effectively. By benchmarking against competitors, the business can identify best practices and implement strategies to improve its ROA.

Assessing the Impact of Business Decisions on Profitability

Assessing the impact of business decisions on profitability involves reviewing the profitability ratios before and after key business decisions. This helps to determine how business decisions impact profitability and to evaluate the efficacy of those decisions. It is important to regularly assess the profitability of key decisions and make adjustments as necessary to ensure continued business success.

For instance, if a business decides to invest in new technology, it is important to assess the impact of this decision on profitability. The business can evaluate the impact by comparing profitability ratios before and after the investment. This will help the business to determine if the investment was worthwhile and if any adjustments need to be made to maximize profitability.

In conclusion, analyzing profitability trends is critical for any business that wants to achieve long-term success. By identifying patterns in profitability ratios, benchmarking against competitors, and assessing the impact of business decisions on profitability, businesses can make informed decisions that improve profitability and ensure continued growth.

Performing profitability analysis is a critical aspect of running a successful business. By using Excel, you can quickly and easily calculate key ratios and analyze trends in profitability. Implementing these steps can help to identify areas of improvement and make informed business decisions that can ultimately improve your bottom line.

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How to Build a Profit Plan for Your Business

By   Eric Dickmann

February 6, 2023

In order to achieve business goals, a profit plan is crucial. It serves as a financial roadmap for the company. However, with competing demands, it can be challenging to begin. Market demand and competitive factors, along with seasonal cash-flow changes, can be unpredictable.

To build a profit plan, start by understanding your business goals. Get all key stakeholders involved to align the plan with those goals. Decide on key metrics to track and what tools to use for tracking. Ensure you're relying on relevant and legitimate data sources. Everyone should agree on the validity of the numbers. Analytical tools can help track and measure progress against goals.

What is a Profit Plan?

A profit plan is a detailed financial plan that outlines a company's strategies and goals for generating revenue and managing expenses in order to achieve a specific level of profitability. The profit plan typically includes a detailed budget that outlines projected revenues and expenses, as well as a forecast of the company's cash flow, balance sheet, and income statement. The profit plan is an essential tool for any business, as it helps managers make informed decisions about how to allocate resources, invest in growth opportunities, and manage risk. It also serves as a roadmap for the company's financial future, providing a framework for monitoring performance and making adjustments as necessary. A typical profit plan will include the following components:

• Revenue Projections: This includes estimates of sales, pricing, and volume for the coming year.
• Cost Projections:  This includes estimates of all direct and indirect costs associated with producing and delivering goods and services, such as labor, materials, overhead, and marketing expenses.
• Cash Flow Analysis: This includes projections of cash inflows and outflows, as well as a plan for managing cash reserves.
• Balance Sheet Projections: This includes estimates of the company's assets, liabilities, and equity over the coming year.
• Income Statement Projections: This includes estimates of the company's revenue, expenses, and net income for the coming year.

By creating a comprehensive profit plan, a business can set realistic goals and targets, monitor progress toward those goals, and make informed decisions about how to allocate resources and manage risk. It can also help to identify potential areas for improvement and optimization, which can ultimately help the business to achieve greater profitability and success over time.

Benefits of a Profit Plan

A formal profit plan prepares a company for possible challenges and ensures maximum profit. CPAsNet noted that profit plans are beneficial to:

• Help owners achieve their financial goals
• Improve and measure performance
• Establish a framework for making decisions
• Educate and motivate key employees

Building a Profit Plan for Your Business

It is important to consider profit when making plans for your business because profit is the ultimate goal of any business. Without profit, a business cannot sustain itself, pay its employees, or invest in growth and development. Profit is also a key indicator of a business's success and can attract investors and potential partners. By considering profit in their plans, business owners can make informed decisions about pricing, marketing, and investment strategies that will help them maximize their revenue and achieve their goals. Ultimately, profit is the lifeblood of any business, and considering it in every decision is crucial for long-term success.

Profit  doesn’t happen by itself. Look over your processes and envision how you want it all to unfold. Here are some suggested steps to consider when making your plan:

• Set a Profit Goal-  Set clear targets and make a plan for how you should get there. A target profit gives your business a set of goals to work throughout the year. Consider the number of units sold with its fixed and variable cost. When it comes to expected profit, slightly underestimate rather than overestimate.
• Create a Budget-  Make a detailed budget plan. Have a look at financing options for your business. Set a potential plan B in case “things” happen. Estimate just how much you perceive your business is going to spend in a certain amount of time.
• List Expenses-  Be sure to write down every single expense the business makes during its operations. It lets you know where you are spending too much. Use costing sheets to track all cost associated with each product. In this way, you can calculate the gross profit.
• Calculate the Profit Margin-  A margin is what keeps you in business. It is equal to the gross profit divided by the revenue and multiplied by 100. It will vary per industry, but according to  The Corporate Finance Institute , a 10% net profit margin is considered average.
• Keep the Costs Down- Entrepreneurs don’t need to spend a lot of money. Find smart ways to start with less money. Set a margin that covers your costs including overhead. Make a realistic budget to help you achieve your goals.

The best way to start  profit planning is to understand your business goals. Then make a detailed budget plan based on those goals. List down the income and expenses and keep your costs down as much as possible. The higher the profit margin, the more it can sustain your business and put you on the road to success.

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Eric Dickmann

About the author

Eric Dickmann is the Founder / CMO of The Five Echelon Group, host of the weekly podcast "The Virtual CMO" and YouTube series "Work-Life" and a fractional CMO for a variety of small and midsize companies. An executive leader with over 30 years of experience in marketing, product development, and digital transformation, he has worked with large, global companies and small startups to develop and execute marketing strategies to bring innovative products to the market.

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7 Financial Forecasting Methods to Predict Business Performance

• 21 Jun 2022

Much of accounting involves evaluating past performance. Financial results demonstrate business success to both shareholders and the public. Planning and preparing for the future, however, is just as important.

Shareholders must be reassured that a business has been, and will continue to be, successful. This requires financial forecasting.

Here's an overview of how to use pro forma statements to conduct financial forecasting, along with seven methods you can leverage to predict a business's future performance.

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What Is Financial Forecasting?

Financial forecasting is predicting a company’s financial future by examining historical performance data, such as revenue, cash flow, expenses, or sales. This involves guesswork and assumptions, as many unforeseen factors can influence business performance.

Financial forecasting is important because it informs business decision-making regarding hiring, budgeting, predicting revenue, and strategic planning . It also helps you maintain a forward-focused mindset.

Each financial forecast plays a major role in determining how much attention is given to individual expense items. For example, if you forecast high-level trends for general planning purposes, you can rely more on broad assumptions than specific details. However, if your forecast is concerned with a business’s future, such as a pending merger or acquisition, it's important to be thorough and detailed.

Forecasting with Pro Forma Statements

A common type of forecasting in financial accounting involves using pro forma statements . Pro forma statements focus on a business's future reports, which are highly dependent on assumptions made during preparation⁠, such as expected market conditions.

Because the term "pro forma" refers to projections or forecasts, pro forma statements apply to any financial document, including:

• Income statements
• Balance sheets
• Cash flow statements

These statements serve both internal and external purposes. Internally, you can use them for strategic planning. Identifying future revenues and expenses can greatly impact business decisions related to hiring and budgeting. Pro forma statements can also inform endeavors by creating multiple statements and interchanging variables to conduct side-by-side comparisons of potential outcomes.

Externally, pro forma statements can demonstrate the risk of investing in a business. While this is an effective form of forecasting, investors should know that pro forma statements don't typically comply with generally accepted accounting principles (GAAP) . This is because pro forma statements don't include one-time expenses—such as equipment purchases or company relocations—which allows for greater accuracy because those expenses don't reflect a company’s ongoing operations.

7 Financial Forecasting Methods

Pro forma statements are incredibly valuable when forecasting revenue, expenses, and sales. These findings are often further supported by one of seven financial forecasting methods that determine future income and growth rates.

There are two primary categories of forecasting: quantitative and qualitative.

Quantitative Methods

When producing accurate forecasts, business leaders typically turn to quantitative forecasts , or assumptions about the future based on historical data.

1. Percent of Sales

Internal pro forma statements are often created using percent of sales forecasting . This method calculates future metrics of financial line items as a percentage of sales. For example, the cost of goods sold is likely to increase proportionally with sales; therefore, it’s logical to apply the same growth rate estimate to each.

To forecast the percent of sales, examine the percentage of each account’s historical profits related to sales. To calculate this, divide each account by its sales, assuming the numbers will remain steady. For example, if the cost of goods sold has historically been 30 percent of sales, assume that trend will continue.

2. Straight Line

The straight-line method assumes a company's historical growth rate will remain constant. Forecasting future revenue involves multiplying a company’s previous year's revenue by its growth rate. For example, if the previous year's growth rate was 12 percent, straight-line forecasting assumes it'll continue to grow by 12 percent next year.

Although straight-line forecasting is an excellent starting point, it doesn't account for market fluctuations or supply chain issues.

3. Moving Average

Moving average involves taking the average—or weighted average—of previous periods⁠ to forecast the future. This method involves more closely examining a business’s high or low demands, so it’s often beneficial for short-term forecasting. For example, you can use it to forecast next month’s sales by averaging the previous quarter.

Moving average forecasting can help estimate several metrics. While it’s most commonly applied to future stock prices, it’s also used to estimate future revenue.

To calculate a moving average, use the following formula:

A1 + A2 + A3 … / N

Formula breakdown:

A = Average for a period

N = Total number of periods

Using weighted averages to emphasize recent periods can increase the accuracy of moving average forecasts.

4. Simple Linear Regression

Simple linear regression forecasts metrics based on a relationship between two variables⁠: dependent and independent. The dependent variable represents the forecasted amount, while the independent variable is the factor that influences the dependent variable.

The equation for simple linear regression is:

Y ⁠ = Dependent variable⁠ (the forecasted number)

B = Regression line's slope

X = Independent variable

A = Y-intercept

5. Multiple Linear Regression

If two or more variables directly impact a company's performance, business leaders might turn to multiple linear regression . This allows for a more accurate forecast, as it accounts for several variables that ultimately influence performance.

To forecast using multiple linear regression, a linear relationship must exist between the dependent and independent variables. Additionally, the independent variables can’t be so closely correlated that it’s impossible to tell which impacts the dependent variable.

Qualitative Methods

When it comes to forecasting, numbers don't always tell the whole story. There are additional factors that influence performance and can't be quantified. Qualitative forecasting relies on experts’ knowledge and experience to predict performance rather than historical numerical data.

These forecasting methods are often called into question, as they're more subjective than quantitative methods. Yet, they can provide valuable insight into forecasts and account for factors that can’t be predicted using historical data.

6. Delphi Method

The Delphi method of forecasting involves consulting experts who analyze market conditions to predict a company's performance.

A facilitator reaches out to those experts with questionnaires, requesting forecasts of business performance based on their experience and knowledge. The facilitator then compiles their analyses and sends them to other experts for comments. The goal is to continue circulating them until a consensus is reached.

7. Market Research

Market research is essential for organizational planning. It helps business leaders obtain a holistic market view based on competition, fluctuating conditions, and consumer patterns. It’s also critical for startups when historical data isn’t available. New businesses can benefit from financial forecasting because it’s essential for recruiting investors and budgeting during the first few months of operation.

When conducting market research, begin with a hypothesis and determine what methods are needed. Sending out consumer surveys is an excellent way to better understand consumer behavior when you don’t have numerical data to inform decisions.

Improve Your Forecasting Skills

Financial forecasting is never a guarantee, but it’s critical for decision-making. Regardless of your business’s industry or stage, it’s important to maintain a forward-thinking mindset—learning from past patterns is an excellent way to plan for the future.

If you’re interested in further exploring financial forecasting and its role in business, consider taking an online course, such as Financial Accounting , to discover how to use it alongside other financial tools to shape your business.

Do you want to take your financial accounting skills to the next level? Consider enrolling in Financial Accounting —one of three courses comprising our Credential of Readiness (CORe) program —to learn how to use financial principles to inform business decisions. Not sure which course is right for you? Download our free flowchart .

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