Profit and loss forecast: how to make one, with a worked example

Short answer: a profit and loss forecast (P&L forecast, or projected or pro forma P&L) is your best estimate of next year’s Profit and Loss, usually by month or quarter: the sales you expect, less cost of sales, overheads, depreciation and interest, giving the profit you expect to make. Build it from last year’s actual P&L, then change only the lines where you know something will be different: a price rise, a new hire, a new van, a lost customer. Its job is to answer “will we make money next year, and what does this decision do to that?” before you commit. It does not tell you whether the bank balance will hold up, because tax, loan capital, equipment and drawings are not in a P&L; that is what a cash flow forecast is for.

Profit and loss forecast vs cash flow forecast

	Profit and loss forecast	Cash flow forecast
Question	Will we make a profit, and how much?	Will the bank balance stay above zero, and when is it lowest?
Sales counted	When invoiced (earned)	When customers pay
Equipment	Spread over its life as depreciation	The full price, when you pay for it
Loans	Interest only	Interest and capital repayments
VAT or GST, income or company tax, drawings	Left out (tax is usually shown as one line under profit)	Included, in the month they are paid
Starts from	Last year’s Profit and Loss	Today’s bank balance

Most small businesses need both: the P&L forecast to see whether the plan makes money, and the cash forecast to see whether you can pay for it on the way. A budget is the same thing as a forecast set once as a target; Xero calls its P&L forecasts budgets. If “pro forma” comes up with a lender or buyer, it means a P&L showing figures as if a change (a new loan, a purchase, a hire) had happened, which is what the worked example below does. Lenders often also ask for a projected Balance Sheet; a 3-way cash flow forecast links all three statements, with a worked quarter.

How to make a profit and loss forecast in six steps

1. Start from last year’s actual P&L by month. In Xero, run the Profit and Loss for the last 12 months with a column per month (the profit and loss by month guide shows how). Seasonal patterns come for free.
2. Forecast sales from what drives them, not from a growth percentage you hope for: prices, customer numbers, jobs per week, people who can do the work. Write each assumption down next to the line.
3. Forecast cost of sales as a percentage of sales, using last year’s gross margin unless something changes it, such as supplier price rises or a different mix of work. The margin and markup calculator converts between the two if your prices are set as a markup.
4. List overheads line by line. Most are last year’s figure plus known changes: the pay rise, the rent review, insurance renewal. Spread annual costs evenly across the months so one month does not look like a disaster.
5. Add depreciation and interest for anything you plan to buy or borrow for. A 60,000 van used for five years is 12,000 a year of depreciation, not 60,000 in the month you buy it.
6. Total each month and the year, then test the assumptions. Change the one or two assumptions you are least sure about (usually sales) and see what happens to profit. A forecast that only works if everything goes right is not a plan.

A worked example: an electrical contractor deciding whether to hire

An electrical contracting company in Perth made 820,000 of sales last financial year, with materials and subcontractors at 40% of sales (a 60% gross margin) and 92,000 profit before tax. For the year to 30 June 2027 the owner wants to take on one more qualified electrician from 1 October, with a second van on a loan.

The assumptions:

• Existing work: last year’s 820,000 plus a 2% price rise, about 836,000.
• New electrician: 84,000 of extra sales over their first nine months, as they build up work.
• Cost of sales: 40% of sales, as last year.
• Wages and super: 300,000 for the existing team (the July pay rise adds 10,000), plus 85,000 a year for the new electrician, so 21,250 a quarter from October.
• Second van: 60,000 on a loan, 2,500 a quarter to run, 3,000 a quarter depreciation (five years) and about 1,000 a quarter interest.
• Other overheads: last year’s figures (vehicles 38,000, rent 30,000, insurance 12,000, software and phones 9,000, other 21,000).

	Jul–Sep	Oct–Dec	Jan–Mar	Apr–Jun	Year
Sales	210,000	230,000	220,000	260,000	920,000
Cost of sales (40%)	84,000	92,000	88,000	104,000	368,000
Gross profit	126,000	138,000	132,000	156,000	552,000
Wages and super	75,000	96,250	96,250	96,250	363,750
Vehicles	9,500	12,000	12,000	12,000	45,500
Rent	7,500	7,500	7,500	7,500	30,000
Insurance	3,000	3,000	3,000	3,000	12,000
Software and phones	2,250	2,250	2,250	2,250	9,000
Other overheads	5,250	5,250	5,250	5,250	21,000
Depreciation (van)	–	3,000	3,000	3,000	9,000
Interest (van loan)	–	1,000	1,000	1,000	3,000
Profit before tax	23,500	7,750	1,750	25,750	58,750

Sales go up by 100,000 (12%), and profit goes down from 92,000 to 58,750. The extra sales bring 60,000 of extra gross profit, but the year carries 93,250 of extra cost: 63,750 for nine months of the new electrician, the 10,000 pay rise, 7,500 to run the van and 12,000 of depreciation and interest. January to March, the quiet quarter, is only just above break-even at 1,750.

That does not mean “don’t hire”. It means the owner knows what the hire has to produce. A full year of the new electrician costs about 111,000 (85,000 wages and super, 10,000 to run the van, 12,000 depreciation, about 4,000 interest). At a 60% gross margin they need to bring in about 185,000 a year, roughly 15,400 a month, to pay for themselves; the forecast has them at 84,000 in nine months, or about 9,300 a month. The questions to answer before October are where the extra 6,000 a month of work comes from and how quickly. The free can I afford to hire calculator runs this sum for any role.

Then test the shakiest assumption. If the new electrician brings in 50,000 instead of 84,000, sales fall by 34,000, gross profit by 20,400 (60%), and profit before tax to 38,350. If the 2% price rise does not stick, take off another 16,400 of sales and about 9,800 of profit. Both together leave about 28,500, under a third of last year. A company paying 25% tax would also take about 14,700 off the 58,750, and the van’s 60,000 price and loan repayments belong in the cash forecast, not here.

Making a profit and loss forecast in Xero

Xero’s Budget Manager is a P&L forecast: you set a figure for each revenue and expense account by month, either typed in or started from last year’s actual figures with a percentage change, and (on plans that include budgets) compare it with actual results in the Budget Variance report. The budget vs actual in Xero guide covers the setup and which plans include it. Budgets work at account level, so a forecast built on drivers (jobs, hours, prices) is easier in a spreadsheet: export last year’s Profit and Loss by month to Excel or Google Sheets, add an assumptions block, and type the totals back into Budget Manager if you want Xero to track against them. The free profit and loss sheet gives you the layout with the formulas built in.

To check what the forecast means for your bank balance, carry the same months into a cash forecast: move sales to when customers pay, add VAT or GST and tax payments, swap depreciation for the equipment’s actual cost and add loan capital and drawings. The cash flow budget guide walks through that conversion.

Common mistakes

• Forecasting the profit you want, then filling in sales to match. Start from what drives sales and let the profit be what it is.
• Adding costs for a decision but not the time it takes to pay off. New people, premises and equipment cost money from day one; the extra sales arrive later.
• Putting annual costs in one month. It makes that month look like a loss and the others look better than they are.
• Leaving out depreciation and interest on things you plan to buy. The P&L then flatters the decision.
• Never comparing. Each month, put the actual P&L next to the forecast, explain the biggest differences, and update the rest of the year. A variance commentary of two or three lines is enough. Partway through the year, set the year to date profit and loss against the same months of the forecast, and project the rest of the year from the forecast’s remaining months rather than multiplying the year so far up to 12: in a seasonal business that can make a falling year look like a rising one.

Common questions

What is a profit and loss forecast? An estimate of your Profit and Loss for a future period, usually the next 12 months by month or quarter: expected sales, less cost of sales, overheads, depreciation and interest, giving expected profit. It shows whether your plans for the year make money.

What is the difference between a P&L forecast and a cash flow forecast? A P&L forecast counts sales when earned and spreads equipment as depreciation, so it shows profit. A cash flow forecast counts money when it moves through the bank, including tax, loan repayments, equipment and drawings, so it shows the bank balance and the lowest month. You can forecast a profit and still run short of cash.

What is a pro forma P&L? A projected Profit and Loss, often prepared for a lender, investor or buyer, showing the results the business expects, or what past results would have looked like after a change such as a new loan, an acquisition or a new hire.

How do I forecast sales for a P&L forecast? From what drives them: last year’s sales by month, adjusted for price changes, customers won or lost, and how much work your people can do. Write each assumption down so you can check it against actual results later.

Can Xero do a profit and loss forecast? Yes. Xero’s Budget Manager lets you set a figure for each P&L account by month, starting from last year’s actual figures if you like, and the Budget Variance report compares it with actual results. Budgets are not included on every Xero plan.

How often should I update a P&L forecast? Compare it with actual results every month and roll the remaining months forward when something changes, such as a big customer won or lost, a price change or a new hire. Rebuild it fully once a year.

Watch the actual figures against the plan every week

A forecast is only useful if you notice early when the months stop following it. ReportPilot reads your Xero figures and sends a short plain-English email every Monday: how sales and net profit compare with last month, cash in the bank, who owes you and how much is overdue, and bills due soon. Its dashboard keeps 24 months of sales, profit, cash and money owed to you by month, which is the starting point for next year’s forecast. It asks Xero for read-only access, so it can read your accounts but never change them, and there is a 14-day free trial with no card. To test what a sales drop would do to profit first, try the free break-even calculator.