calculating profit business plan

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Profit Margin: How to Calculate It, What It Tells You

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Profit margin is the percentage of revenue (income from sales) your business keeps as profit. It is one of the most common metrics used in accounting to determine your business's health. Using profit margin is an easy way to compare your business with others in your industry. Because profit margin is a percentage, a mom-and-pop retail shop can compare its profit margin with a big-box retailer and determine how it’s performing compared with the competition even though the competition may be operating on a much larger scale.

» MORE: Most profitable businesses

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The four types of profit margin and what they tell you

When someone refers to profit margin, they are usually talking about the bottom line, or net profit margin. While net profit margin is important, there are three other kinds of profit margin that can also give you insights into the health of your business.

Gross profit margin

Gross profit margin tells you how much of every sale is available to use for your business operations. The formula for gross profit margin is:

(Net sales – Cost of goods sold) / Net sales = Gross profit margin

“Net sales” refers to your total revenue from sales after subtracting discounts and returns. “Cost of goods sold” refers to the expenses a business incurs to produce a product or deliver a service. When a service is delivered, “cost of sales” is often used instead of “cost of goods sold.”

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Let’s say your business manufactures fireworks. Your net sales for the past year total $750,000. The cost of manufacturing those fireworks is $300,000. Your gross profit margin would be calculated as follows:

($750,000 – $300,000) / $750,000 = Gross profit margin

$450,000 / $750,000 = $0.60

60% = Gross profit margin

In other words, 60 cents of every dollar your business makes in sales (after discounts and returns) is available for you to use to run your business.

Gross profit margin is often used to determine which products or services are most profitable, but you can also use it to review a business’s overall profitability before accounting for operating costs.

Operating profit margin

Operating profit margin tells you how much of your business’s income is available to pay debt, taxes and draws or distributions to the business’s owners or shareholders. The formula for operating profit margin is:

(Operating income / Revenue) x 100 = Operating profit margin

Before you can calculate your operating profit margin, you first need to calculate your operating income. And before you can calculate your operating income, you must calculate your gross profit. Gross profit is different from gross profit margin. In our example above, the gross profit for your fireworks business is $450,000, or revenue ($750,000) minus cost of goods sold ($300,000).

Revenue – Cost of goods sold = Gross profit

$750,000 – $300,000 = $450,000

$450,000 = Gross profit

Once you know your gross profit you need to subtract your operating expenses from it to get your operating income number. Let’s say your operating expenses total $175,000 per year. This is how much you pay for rent, utilities, payroll and everything except income taxes and interest. You’ll also exclude draws or distributions to the owners or shareholders of the company from your operating expenses calculation.

Gross profit – Operating expenses = Operating income

$450,000 – $175,000 = $275,000

$275,000 = Operating income

Now you have all the information you need to calculate your business’s operating profit margin.

($275,000 / $750,000) x 100 = 37%

37% = Operating profit margin

The picture so far

Let’s take a minute to step back and look at what we now know about your business:

Your business generates $750,000 in sales.

It costs you $300,000 to generate that $750,000. This means your business has $450,000 available for operations. This equals 60 cents of every dollar your business earns.

$175,000 of that $450,000 is used to run your business. Remember, this amount doesn’t include interest, taxes, debt payments or draws or distributions.

$275,000 of the $750,000 your business generates is available for non-operating payments. This equates to 37% or 37 cents of every dollar your business earns. In other words, 63 cents of every sale goes to either producing that sale or operating your business.

Pretax profit margin

Pretax profit margin is essentially the same as operating profit margin, except now you’ll include interest (both expenses and income). Operating profit margin and pretax profit margin are often used interchangeably. The distinction only becomes an issue when a company is being valued by a banker or a professional valuator for sale or acquisition. Bankers and valuators exclude interest from their valuations.

The important takeaway here is that pretax profit margin includes all income (including interest income) minus all expenses except taxes.

Net profit margin

Net profit margin is usually what people mean when they refer to profit margin. Net profit margin is the culmination of all the other types of profit margin. It looks like this:

((Operating income – Other expenses – Interest – Taxes) / Revenue) x 100 = Net profit margin

Let’s look at the three components of the equation we haven’t discussed yet:

Other expenses: This refers to nonoperating expenses the business incurs. A common “other expense” is the gain or loss on the sale of an asset. For the sake of our example, let’s say we sold a label machine we no longer use because we stopped producing firecrackers. After accounting for depreciation, we lost $1,000 from the sale. That $1,000 is an “other expense.”

Interest: Interest sometimes gets lumped in with “other expenses.” Like the gain or loss on the sale of the label machine, interest doesn’t directly relate to our business’s operations. Let’s say we earned $2,500 in interest on money held in savings accounts and spent $5,000 in interest on a loan for a new HVAC system for our plant. We would net these two amounts together and subtract the $2,500 in net interest when we complete our net profit margin equation. If we had earned $5,000 in interest and only spent $2,500, then we would add the $2,500 when we complete the net profit margin equation.

Taxes: Unless your business is a C-corporation, taxes won’t appear on your profit and loss statement as an expense. Most businesses in the U.S. are taxed as pass-through entities, meaning individuals pay the taxes and not the business itself. However, let’s assume our fireworks business is a C-corp and paid $7,500 in taxes.

Now we’re ready to calculate our net profit margin:

(($275,000 (operating income) – $1,000 – $2,500 – $7,500) / $750,000 (revenue)) x 100 = Net profit margin

($264,000 / $750,000) x 100 = 35%

35% = Net profit margin

Boiling it all down

We now have a pretty clear picture of your business’s profitability. In summary:

60% of every dollar in sales is available for you to use to run your business (gross profit margin).

You have 37% of every dollar in sales available for debt payments, taxes and draws or distributions after paying operating expenses. The other 63% goes to either producing the sale or running the business (operating profit margin).

After you pay your taxes and account for interest, 35% of your business’s sales are available for draws or distributions and debt payments (net profit margin).

For the majority of small businesses, gross profit margin and net profit margin will be most important and most meaningful. These two metrics will let you compare your business with others in your industry so you can see at a glance how you are doing, regardless of the size of your competition.

Generally speaking, the higher your profit margin, the better. A high gross profit margin means you have more money available to run your business. A high net profit margin means you have more money available to distribute to owners or shareholders in the business.

A “good” profit margin varies from industry to industry. Some industries — like food services — have high overhead costs and by extension low profit margins. Professional services industries — like accounting and attorneys — have lower overhead costs which result in high profit margins. Overall, though, a 5% margin is low, a 10% margin is average, and a 20% margin is good or high. So try to target a net profit margin between 15% and 20% in your business.

Reducing operating expenses is an easy way to quickly increase net profit margin, but in order to maximize overall profitability, businesses should also focus on increasing gross profit margin.

There are four primary ways to increase gross profit margin, which by extension increases net profit margin.

Discontinue products or services with a low gross profit margin. The exception to this is “loss leader” products that attract new customers or encourage them to buy higher-margin products.

Expand your product or service line carefully. Sometimes the administrative costs of managing more products or services can eat up your additional profitability.

Reprice low-margin products or services. Referring back to our fireworks example, let’s say each unit is priced at $7.50 and you sold 100,000 units. If you increase the unit price to $8, your net sales would increase to $800,000, making your gross profit margin ratio 63%.

Find less expensive ways to obtain or produce products or services. Let’s say you reduce your cost of goods sold by $0.50 per unit. Your cost of goods sold on 100,000 units would drop from $300,000 to $250,000, and your gross profit margin ratio on $750,000 in net sales would then be 67%.

Discontinue products or services with a low gross profit margin.

The exception to this is “loss leader” products that attract new customers or encourage them to buy higher-margin products.

Expand your product or service line carefully.

Sometimes the administrative costs of managing more products or services can eat up your additional profitability.

Reprice low-margin products or services.

Referring back to our fireworks example, let’s say each unit is priced at $7.50 and you sold 100,000 units. If you increase the unit price to $8, your net sales would increase to $800,000, making your gross profit margin ratio 63%.

Find less expensive ways to obtain or produce products or services.

Let’s say you reduce your cost of goods sold by $0.50 per unit. Your cost of goods sold on 100,000 units would drop from $300,000 to $250,000, and your gross profit margin ratio on $750,000 in net sales would then be 67%.

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How to Write a Business Plan in 9 Steps (+ Template and Examples)

Every successful business has one thing in common, a good and well-executed business plan. A business plan is more than a document, it is a complete guide that outlines the goals your business wants to achieve, including its financial goals . It helps you analyze results, make strategic decisions, show your business operations and growth.

If you want to start a business or already have one and need to pitch it to investors for funding, writing a good business plan improves your chances of attracting financiers. As a startup, if you want to secure loans from financial institutions, part of the requirements involve submitting your business plan.

Writing a business plan does not have to be a complicated or time-consuming process. In this article, you will learn the step-by-step process for writing a successful business plan.

You will also learn what you need a business plan for, tips and strategies for writing a convincing business plan, business plan examples and templates that will save you tons of time, and the alternatives to the traditional business plan.

Let’s get started.

What Do You Need A Business Plan For?

Businesses create business plans for different purposes such as to secure funds, monitor business growth, measure your marketing strategies, and measure your business success.

1. Secure Funds

One of the primary reasons for writing a business plan is to secure funds, either from financial institutions/agencies or investors.

For you to effectively acquire funds, your business plan must contain the key elements of your business plan . For example, your business plan should include your growth plans, goals you want to achieve, and milestones you have recorded.

A business plan can also attract new business partners that are willing to contribute financially and intellectually. If you are writing a business plan to a bank, your project must show your traction , that is, the proof that you can pay back any loan borrowed.

Also, if you are writing to an investor, your plan must contain evidence that you can effectively utilize the funds you want them to invest in your business. Here, you are using your business plan to persuade a group or an individual that your business is a source of a good investment.

2. Monitor Business Growth

A business plan can help you track cash flows in your business. It steers your business to greater heights. A business plan capable of tracking business growth should contain:

• The business goals
• Methods to achieve the goals
• Time-frame for attaining those goals

A good business plan should guide you through every step in achieving your goals. It can also track the allocation of assets to every aspect of the business. You can tell when you are spending more than you should on a project.

You can compare a business plan to a written GPS. It helps you manage your business and hints at the right time to expand your business.

3. Measure Business Success

A business plan can help you measure your business success rate. Some small-scale businesses are thriving better than more prominent companies because of their track record of success.

Right from the onset of your business operation, set goals and work towards them. Write a plan to guide you through your procedures. Use your plan to measure how much you have achieved and how much is left to attain.

You can also weigh your success by monitoring the position of your brand relative to competitors. On the other hand, a business plan can also show you why you have not achieved a goal. It can tell if you have elapsed the time frame you set to attain a goal.

4. Document Your Marketing Strategies

You can use a business plan to document your marketing plans. Every business should have an effective marketing plan.

Competition mandates every business owner to go the extraordinary mile to remain relevant in the market. Your business plan should contain your marketing strategies that work. You can measure the success rate of your marketing plans.

In your business plan, your marketing strategy must answer the questions:

• How do you want to reach your target audience?
• How do you plan to retain your customers?
• What is/are your pricing plans?
• What is your budget for marketing?

How to Write a Business Plan Step-by-Step

1. create your executive summary.

The executive summary is a snapshot of your business or a high-level overview of your business purposes and plans . Although the executive summary is the first section in your business plan, most people write it last. The length of the executive summary is not more than two pages.

Generally, there are nine sections in a business plan, the executive summary should condense essential ideas from the other eight sections.

A good executive summary should do the following:

• A Snapshot of Growth Potential. Briefly inform the reader about your company and why it will be successful)
• Contain your Mission Statement which explains what the main objective or focus of your business is.
• Product Description and Differentiation. Brief description of your products or services and why it is different from other solutions in the market.
• The Team. Basic information about your company’s leadership team and employees
• Business Concept. A solid description of what your business does.
• Target Market. The customers you plan to sell to.
• Marketing Strategy. Your plans on reaching and selling to your customers
• Current Financial State. Brief information about what revenue your business currently generates.
• Projected Financial State. Brief information about what you foresee your business revenue to be in the future.

The executive summary is the make-or-break section of your business plan. If your summary cannot in less than two pages cannot clearly describe how your business will solve a particular problem of your target audience and make a profit, your business plan is set on a faulty foundation.

Avoid using the executive summary to hype your business, instead, focus on helping the reader understand the what and how of your plan.

View the executive summary as an opportunity to introduce your vision for your company. You know your executive summary is powerful when it can answer these key questions:

• Who is your target audience?
• What sector or industry are you in?
• What are your products and services?
• What is the future of your industry?
• Is your company scaleable?
• Who are the owners and leaders of your company? What are their backgrounds and experience levels?
• What is the motivation for starting your company?
• What are the next steps?

Writing the executive summary last although it is the most important section of your business plan is an excellent idea. The reason why is because it is a high-level overview of your business plan. It is the section that determines whether potential investors and lenders will read further or not.

The executive summary can be a stand-alone document that covers everything in your business plan. It is not uncommon for investors to request only the executive summary when evaluating your business. If the information in the executive summary impresses them, they will ask for the complete business plan.

If you are writing your business plan for your planning purposes, you do not need to write the executive summary.

2. Add Your Company Overview

The company overview or description is the next section in your business plan after the executive summary. It describes what your business does.

Adding your company overview can be tricky especially when your business is still in the planning stages. Existing businesses can easily summarize their current operations but may encounter difficulties trying to explain what they plan to become.

Your company overview should contain the following:

• What products and services you will provide
• Geographical markets and locations your company have a presence
• What you need to run your business
• Who your target audience or customers are
• Who will service your customers
• Your company’s purpose, mission, and vision
• Information about your company’s founders
• Who the founders are
• Notable achievements of your company so far

When creating a company overview, you have to focus on three basics: identifying your industry, identifying your customer, and explaining the problem you solve.

If you are stuck when creating your company overview, try to answer some of these questions that pertain to you.

• Who are you targeting? (The answer is not everyone)
• What pain point does your product or service solve for your customers that they will be willing to spend money on resolving?
• How does your product or service overcome that pain point?
• Where is the location of your business?
• What products, equipment, and services do you need to run your business?
• How is your company’s product or service different from your competition in the eyes of your customers?
• How many employees do you need and what skills do you require them to have?

After answering some or all of these questions, you will get more than enough information you need to write your company overview or description section. When writing this section, describe what your company does for your customers.

The company description or overview section contains three elements: mission statement, history, and objectives.

• Mission Statement

The mission statement refers to the reason why your business or company is existing. It goes beyond what you do or sell, it is about the ‘why’. A good mission statement should be emotional and inspirational.

Your mission statement should follow the KISS rule (Keep It Simple, Stupid). For example, Shopify’s mission statement is “Make commerce better for everyone.”

When describing your company’s history, make it simple and avoid the temptation of tying it to a defensive narrative. Write it in the manner you would a profile. Your company’s history should include the following information:

• Founding Date
• Major Milestones
• Location(s)
• Flagship Products or Services
• Number of Employees
• Executive Leadership Roles

When you fill in this information, you use it to write one or two paragraphs about your company’s history.

Business Objectives

Your business objective must be SMART (specific, measurable, achievable, realistic, and time-bound.) Failure to clearly identify your business objectives does not inspire confidence and makes it hard for your team members to work towards a common purpose.

3. Perform Market and Competitive Analyses to Proof a Big Enough Business Opportunity

The third step in writing a business plan is the market and competitive analysis section. Every business, no matter the size, needs to perform comprehensive market and competitive analyses before it enters into a market.

Performing market and competitive analyses are critical for the success of your business. It helps you avoid entering the right market with the wrong product, or vice versa. Anyone reading your business plans, especially financiers and financial institutions will want to see proof that there is a big enough business opportunity you are targeting.

This section is where you describe the market and industry you want to operate in and show the big opportunities in the market that your business can leverage to make a profit. If you noticed any unique trends when doing your research, show them in this section.

Market analysis alone is not enough, you have to add competitive analysis to strengthen this section. There are already businesses in the industry or market, how do you plan to take a share of the market from them?

You have to clearly illustrate the competitive landscape in your business plan. Are there areas your competitors are doing well? Are there areas where they are not doing so well? Show it.

Make it clear in this section why you are moving into the industry and what weaknesses are present there that you plan to explain. How are your competitors going to react to your market entry? How do you plan to get customers? Do you plan on taking your competitors' competitors, tap into other sources for customers, or both?

Illustrate the competitive landscape as well. What are your competitors doing well and not so well?

Answering these questions and thoughts will aid your market and competitive analysis of the opportunities in your space. Depending on how sophisticated your industry is, or the expectations of your financiers, you may need to carry out a more comprehensive market and competitive analysis to prove that big business opportunity.

Instead of looking at the market and competitive analyses as one entity, separating them will make the research even more comprehensive.

Market Analysis

Market analysis, boarding speaking, refers to research a business carried out on its industry, market, and competitors. It helps businesses gain a good understanding of their target market and the outlook of their industry. Before starting a company, it is vital to carry out market research to find out if the market is viable.

The market analysis section is a key part of the business plan. It is the section where you identify who your best clients or customers are. You cannot omit this section, without it your business plan is incomplete.

A good market analysis will tell your readers how you fit into the existing market and what makes you stand out. This section requires in-depth research, it will probably be the most time-consuming part of the business plan to write.

• Market Research

To create a compelling market analysis that will win over investors and financial institutions, you have to carry out thorough market research . Your market research should be targeted at your primary target market for your products or services. Here is what you want to find out about your target market.

• Your target market’s needs or pain points
• The existing solutions for their pain points
• Geographic Location
• Demographics

The purpose of carrying out a marketing analysis is to get all the information you need to show that you have a solid and thorough understanding of your target audience.

Only after you have fully understood the people you plan to sell your products or services to, can you evaluate correctly if your target market will be interested in your products or services.

You can easily convince interested parties to invest in your business if you can show them you thoroughly understand the market and show them that there is a market for your products or services.

How to Quantify Your Target Market

One of the goals of your marketing research is to understand who your ideal customers are and their purchasing power. To quantify your target market, you have to determine the following:

• Your Potential Customers: They are the people you plan to target. For example, if you sell accounting software for small businesses , then anyone who runs an enterprise or large business is unlikely to be your customers. Also, individuals who do not have a business will most likely not be interested in your product.
• Total Households: If you are selling household products such as heating and air conditioning systems, determining the number of total households is more important than finding out the total population in the area you want to sell to. The logic is simple, people buy the product but it is the household that uses it.
• Median Income: You need to know the median income of your target market. If you target a market that cannot afford to buy your products and services, your business will not last long.
• Income by Demographics: If your potential customers belong to a certain age group or gender, determining income levels by demographics is necessary. For example, if you sell men's clothes, your target audience is men.

What Does a Good Market Analysis Entail?

Your business does not exist on its own, it can only flourish within an industry and alongside competitors. Market analysis takes into consideration your industry, target market, and competitors. Understanding these three entities will drastically improve your company’s chances of success.

You can view your market analysis as an examination of the market you want to break into and an education on the emerging trends and themes in that market. Good market analyses include the following:

• Industry Description. You find out about the history of your industry, the current and future market size, and who the largest players/companies are in your industry.
• Overview of Target Market. You research your target market and its characteristics. Who are you targeting? Note, it cannot be everyone, it has to be a specific group. You also have to find out all information possible about your customers that can help you understand how and why they make buying decisions.
• Size of Target Market: You need to know the size of your target market, how frequently they buy, and the expected quantity they buy so you do not risk overproducing and having lots of bad inventory. Researching the size of your target market will help you determine if it is big enough for sustained business or not.
• Growth Potential: Before picking a target market, you want to be sure there are lots of potential for future growth. You want to avoid going for an industry that is declining slowly or rapidly with almost zero growth potential.
• Market Share Potential: Does your business stand a good chance of taking a good share of the market?
• Market Pricing and Promotional Strategies: Your market analysis should give you an idea of the price point you can expect to charge for your products and services. Researching your target market will also give you ideas of pricing strategies you can implement to break into the market or to enjoy maximum profits.
• Potential Barriers to Entry: One of the biggest benefits of conducting market analysis is that it shows you every potential barrier to entry your business will likely encounter. It is a good idea to discuss potential barriers to entry such as changing technology. It informs readers of your business plan that you understand the market.
• Research on Competitors: You need to know the strengths and weaknesses of your competitors and how you can exploit them for the benefit of your business. Find patterns and trends among your competitors that make them successful, discover what works and what doesn’t, and see what you can do better.

The market analysis section is not just for talking about your target market, industry, and competitors. You also have to explain how your company can fill the hole you have identified in the market.

Here are some questions you can answer that can help you position your product or service in a positive light to your readers.

• Is your product or service of superior quality?
• What additional features do you offer that your competitors do not offer?
• Are you targeting a ‘new’ market?

Basically, your market analysis should include an analysis of what already exists in the market and an explanation of how your company fits into the market.

Competitive Analysis

In the competitive analysis section, y ou have to understand who your direct and indirect competitions are, and how successful they are in the marketplace. It is the section where you assess the strengths and weaknesses of your competitors, the advantage(s) they possess in the market and show the unique features or qualities that make you different from your competitors.

Many businesses do market analysis and competitive analysis together. However, to fully understand what the competitive analysis entails, it is essential to separate it from the market analysis.

Competitive analysis for your business can also include analysis on how to overcome barriers to entry in your target market.

The primary goal of conducting a competitive analysis is to distinguish your business from your competitors. A strong competitive analysis is essential if you want to convince potential funding sources to invest in your business. You have to show potential investors and lenders that your business has what it takes to compete in the marketplace successfully.

Competitive analysis will s how you what the strengths of your competition are and what they are doing to maintain that advantage.

When doing your competitive research, you first have to identify your competitor and then get all the information you can about them. The idea of spending time to identify your competitor and learn everything about them may seem daunting but it is well worth it.

Find answers to the following questions after you have identified who your competitors are.

• What are your successful competitors doing?
• Why is what they are doing working?
• Can your business do it better?
• What are the weaknesses of your successful competitors?
• What are they not doing well?
• Can your business turn its weaknesses into strengths?
• How good is your competitors’ customer service?
• Where do your competitors invest in advertising?
• What sales and pricing strategies are they using?
• What marketing strategies are they using?
• What kind of press coverage do they get?
• What are their customers saying about your competitors (both the positive and negative)?

If your competitors have a website, it is a good idea to visit their websites for more competitors’ research. Check their “About Us” page for more information.

If you are presenting your business plan to investors, you need to clearly distinguish yourself from your competitors. Investors can easily tell when you have not properly researched your competitors.

Take time to think about what unique qualities or features set you apart from your competitors. If you do not have any direct competition offering your product to the market, it does not mean you leave out the competitor analysis section blank. Instead research on other companies that are providing a similar product, or whose product is solving the problem your product solves.

The next step is to create a table listing the top competitors you want to include in your business plan. Ensure you list your business as the last and on the right. What you just created is known as the competitor analysis table.

Direct vs Indirect Competition

You cannot know if your product or service will be a fit for your target market if you have not understood your business and the competitive landscape.

There is no market you want to target where you will not encounter competition, even if your product is innovative. Including competitive analysis in your business plan is essential.

If you are entering an established market, you need to explain how you plan to differentiate your products from the available options in the market. Also, include a list of few companies that you view as your direct competitors The competition you face in an established market is your direct competition.

In situations where you are entering a market with no direct competition, it does not mean there is no competition there. Consider your indirect competition that offers substitutes for the products or services you offer.

For example, if you sell an innovative SaaS product, let us say a project management software , a company offering time management software is your indirect competition.

There is an easy way to find out who your indirect competitors are in the absence of no direct competitors. You simply have to research how your potential customers are solving the problems that your product or service seeks to solve. That is your direct competition.

Factors that Differentiate Your Business from the Competition

There are three main factors that any business can use to differentiate itself from its competition. They are cost leadership, product differentiation, and market segmentation.

1. Cost Leadership

A strategy you can impose to maximize your profits and gain an edge over your competitors. It involves offering lower prices than what the majority of your competitors are offering.

A common practice among businesses looking to enter into a market where there are dominant players is to use free trials or pricing to attract as many customers as possible to their offer.

2. Product Differentiation

Your product or service should have a unique selling proposition (USP) that your competitors do not have or do not stress in their marketing.

Part of the marketing strategy should involve making your products unique and different from your competitors. It does not have to be different from your competitors, it can be the addition to a feature or benefit that your competitors do not currently have.

3. Market Segmentation

As a new business seeking to break into an industry, you will gain more success from focusing on a specific niche or target market, and not the whole industry.

If your competitors are focused on a general need or target market, you can differentiate yourself from them by having a small and hyper-targeted audience. For example, if your competitors are selling men’s clothes in their online stores , you can sell hoodies for men.

4. Define Your Business and Management Structure

The next step in your business plan is your business and management structure. It is the section where you describe the legal structure of your business and the team running it.

Your business is only as good as the management team that runs it, while the management team can only strive when there is a proper business and management structure in place.

If your company is a sole proprietor or a limited liability company (LLC), a general or limited partnership, or a C or an S corporation, state it clearly in this section.

Use an organizational chart to show the management structure in your business. Clearly show who is in charge of what area in your company. It is where you show how each key manager or team leader’s unique experience can contribute immensely to the success of your company. You can also opt to add the resumes and CVs of the key players in your company.

The business and management structure section should show who the owner is, and other owners of the businesses (if the business has other owners). For businesses or companies with multiple owners, include the percent ownership of the various owners and clearly show the extent of each others’ involvement in the company.

Investors want to know who is behind the company and the team running it to determine if it has the right management to achieve its set goals.

Management Team

The management team section is where you show that you have the right team in place to successfully execute the business operations and ideas. Take time to create the management structure for your business. Think about all the important roles and responsibilities that you need managers for to grow your business.

Include brief bios of each key team member and ensure you highlight only the relevant information that is needed. If your team members have background industry experience or have held top positions for other companies and achieved success while filling that role, highlight it in this section.

A common mistake that many startups make is assigning C-level titles such as (CMO and CEO) to everyone on their team. It is unrealistic for a small business to have those titles. While it may look good on paper for the ego of your team members, it can prevent investors from investing in your business.

Instead of building an unrealistic management structure that does not fit your business reality, it is best to allow business titles to grow as the business grows. Starting everyone at the top leaves no room for future change or growth, which is bad for productivity.

Your management team does not have to be complete before you start writing your business plan. You can have a complete business plan even when there are managerial positions that are empty and need filling.

If you have management gaps in your team, simply show the gaps and indicate you are searching for the right candidates for the role(s). Investors do not expect you to have a full management team when you are just starting your business.

Key Questions to Answer When Structuring Your Management Team

• Who are the key leaders?
• What experiences, skills, and educational backgrounds do you expect your key leaders to have?
• Do your key leaders have industry experience?
• What positions will they fill and what duties will they perform in those positions?
• What level of authority do the key leaders have and what are their responsibilities?
• What is the salary for the various management positions that will attract the ideal candidates?

Additional Tips for Writing the Management Structure Section

1. Avoid Adding ‘Ghost’ Names to Your Management Team

There is always that temptation to include a ‘ghost’ name to your management team to attract and influence investors to invest in your business. Although the presence of these celebrity management team members may attract the attention of investors, it can cause your business to lose any credibility if you get found out.

Seasoned investors will investigate further the members of your management team before committing fully to your business If they find out that the celebrity name used does not play any actual role in your business, they will not invest and may write you off as dishonest.

2. Focus on Credentials But Pay Extra Attention to the Roles

Investors want to know the experience that your key team members have to determine if they can successfully reach the company’s growth and financial goals.

While it is an excellent boost for your key management team to have the right credentials, you also want to pay extra attention to the roles they will play in your company.

Organizational Chart

Adding an organizational chart in this section of your business plan is not necessary, you can do it in your business plan’s appendix.

If you are exploring funding options, it is not uncommon to get asked for your organizational chart. The function of an organizational chart goes beyond raising money, you can also use it as a useful planning tool for your business.

An organizational chart can help you identify how best to structure your management team for maximum productivity and point you towards key roles you need to fill in the future.

You can use the organizational chart to show your company’s internal management structure such as the roles and responsibilities of your management team, and relationships that exist between them.

5. Describe Your Product and Service Offering

In your business plan, you have to describe what you sell or the service you plan to offer. It is the next step after defining your business and management structure. The products and services section is where you sell the benefits of your business.

Here you have to explain how your product or service will benefit your customers and describe your product lifecycle. It is also the section where you write down your plans for intellectual property like patent filings and copyrighting.

The research and development that you are undertaking for your product or service need to be explained in detail in this section. However, do not get too technical, sell the general idea and its benefits.

If you have any diagrams or intricate designs of your product or service, do not include them in the products and services section. Instead, leave them for the addendum page. Also, if you are leaving out diagrams or designs for the addendum, ensure you add this phrase “For more detail, visit the addendum Page #.”

Your product and service section in your business plan should include the following:

• A detailed explanation that clearly shows how your product or service works.
• The pricing model for your product or service.
• Your business’ sales and distribution strategy.
• The ideal customers that want your product or service.
• The benefits of your products and services.
• Reason(s) why your product or service is a better alternative to what your competitors are currently offering in the market.
• Plans for filling the orders you receive
• If you have current or pending patents, copyrights, and trademarks for your product or service, you can also discuss them in this section.

What to Focus On When Describing the Benefits, Lifecycle, and Production Process of Your Products or Services

In the products and services section, you have to distill the benefits, lifecycle, and production process of your products and services.

When describing the benefits of your products or services, here are some key factors to focus on.

• Unique features
• Translating the unique features into benefits
• The emotional, psychological, and practical payoffs to attract customers
• Intellectual property rights or any patents

When describing the product life cycle of your products or services, here are some key factors to focus on.

• Upsells, cross-sells, and down-sells
• Time between purchases
• Plans for research and development.

When describing the production process for your products or services, you need to think about the following:

• The creation of new or existing products and services.
• The sources for the raw materials or components you need for production.
• Assembling the products
• Maintaining quality control
• Supply-chain logistics (receiving the raw materials and delivering the finished products)
• The day-to-day management of the production processes, bookkeeping, and inventory.

Tips for Writing the Products or Services Section of Your Business Plan

1. Avoid Technical Descriptions and Industry Buzzwords

The products and services section of your business plan should clearly describe the products and services that your company provides. However, it is not a section to include technical jargons that anyone outside your industry will not understand.

A good practice is to remove highly detailed or technical descriptions in favor of simple terms. Industry buzzwords are not necessary, if there are simpler terms you can use, then use them. If you plan to use your business plan to source funds, making the product or service section so technical will do you no favors.

2. Describe How Your Products or Services Differ from Your Competitors

When potential investors look at your business plan, they want to know how the products and services you are offering differ from that of your competition. Differentiating your products or services from your competition in a way that makes your solution more attractive is critical.

If you are going the innovative path and there is no market currently for your product or service, you need to describe in this section why the market needs your product or service.

For example, overnight delivery was a niche business that only a few companies were participating in. Federal Express (FedEx) had to show in its business plan that there was a large opportunity for that service and they justified why the market needed that service.

3. Long or Short Products or Services Section

Should your products or services section be short? Does the long products or services section attract more investors?

There are no straightforward answers to these questions. Whether your products or services section should be long or relatively short depends on the nature of your business.

If your business is product-focused, then automatically you need to use more space to describe the details of your products. However, if the product your business sells is a commodity item that relies on competitive pricing or other pricing strategies, you do not have to use up so much space to provide significant details about the product.

Likewise, if you are selling a commodity that is available in numerous outlets, then you do not have to spend time on writing a long products or services section.

The key to the success of your business is most likely the effectiveness of your marketing strategies compared to your competitors. Use more space to address that section.

If you are creating a new product or service that the market does not know about, your products or services section can be lengthy. The reason why is because you need to explain everything about the product or service such as the nature of the product, its use case, and values.

A short products or services section for an innovative product or service will not give the readers enough information to properly evaluate your business.

4. Describe Your Relationships with Vendors or Suppliers

Your business will rely on vendors or suppliers to supply raw materials or the components needed to make your products. In your products and services section, describe your relationships with your vendors and suppliers fully.

Avoid the mistake of relying on only one supplier or vendor. If that supplier or vendor fails to supply or goes out of business, you can easily face supply problems and struggle to meet your demands. Plan to set up multiple vendor or supplier relationships for better business stability.

5. Your Primary Goal Is to Convince Your Readers

The primary goal of your business plan is to convince your readers that your business is viable and to create a guide for your business to follow. It applies to the products and services section.

When drafting this section, think like the reader. See your reader as someone who has no idea about your products and services. You are using the products and services section to provide the needed information to help your reader understand your products and services. As a result, you have to be clear and to the point.

While you want to educate your readers about your products or services, you also do not want to bore them with lots of technical details. Show your products and services and not your fancy choice of words.

Your products and services section should provide the answer to the “what” question for your business. You and your management team may run the business, but it is your products and services that are the lifeblood of the business.

Key Questions to Answer When Writing your Products and Services Section

Answering these questions can help you write your products and services section quickly and in a way that will appeal to your readers.

• Are your products existing on the market or are they still in the development stage?
• What is your timeline for adding new products and services to the market?
• What are the positives that make your products and services different from your competitors?
• Do your products and services have any competitive advantage that your competitors’ products and services do not currently have?
• Do your products or services have any competitive disadvantages that you need to overcome to compete with your competitors? If your answer is yes, state how you plan to overcome them,
• How much does it cost to produce your products or services? How much do you plan to sell it for?
• What is the price for your products and services compared to your competitors? Is pricing an issue?
• What are your operating costs and will it be low enough for you to compete with your competitors and still take home a reasonable profit margin?
• What is your plan for acquiring your products? Are you involved in the production of your products or services?
• Are you the manufacturer and produce all the components you need to create your products? Do you assemble your products by using components supplied by other manufacturers? Do you purchase your products directly from suppliers or wholesalers?
• Do you have a steady supply of products that you need to start your business? (If your business is yet to kick-off)
• How do you plan to distribute your products or services to the market?

You can also hint at the marketing or promotion plans you have for your products or services such as how you plan to build awareness or retain customers. The next section is where you can go fully into details about your business’s marketing and sales plan.

6. Show and Explain Your Marketing and Sales Plan

Providing great products and services is wonderful, but it means nothing if you do not have a marketing and sales plan to inform your customers about them. Your marketing and sales plan is critical to the success of your business.

The sales and marketing section is where you show and offer a detailed explanation of your marketing and sales plan and how you plan to execute it. It covers your pricing plan, proposed advertising and promotion activities, activities and partnerships you need to make your business a success, and the benefits of your products and services.

There are several ways you can approach your marketing and sales strategy. Ideally, your marketing and sales strategy has to fit the unique needs of your business.

In this section, you describe how the plans your business has for attracting and retaining customers, and the exact process for making a sale happen. It is essential to thoroughly describe your complete marketing and sales plans because you are still going to reference this section when you are making financial projections for your business.

Outline Your Business’ Unique Selling Proposition (USP)

The sales and marketing section is where you outline your business’s unique selling proposition (USP). When you are developing your unique selling proposition, think about the strongest reasons why people should buy from you over your competition. That reason(s) is most likely a good fit to serve as your unique selling proposition (USP).

Target Market and Target Audience

Plans on how to get your products or services to your target market and how to get your target audience to buy them go into this section. You also highlight the strengths of your business here, particularly what sets them apart from your competition.

Before you start writing your marketing and sales plan, you need to have properly defined your target audience and fleshed out your buyer persona. If you do not first understand the individual you are marketing to, your marketing and sales plan will lack any substance and easily fall.

Creating a Smart Marketing and Sales Plan

Marketing your products and services is an investment that requires you to spend money. Like any other investment, you have to generate a good return on investment (ROI) to justify using that marketing and sales plan. Good marketing and sales plans bring in high sales and profits to your company.

Avoid spending money on unproductive marketing channels. Do your research and find out the best marketing and sales plan that works best for your company.

Your marketing and sales plan can be broken into different parts: your positioning statement, pricing, promotion, packaging, advertising, public relations, content marketing, social media, and strategic alliances.

Your Positioning Statement

Your positioning statement is the first part of your marketing and sales plan. It refers to the way you present your company to your customers.

Are you the premium solution, the low-price solution, or are you the intermediary between the two extremes in the market? What do you offer that your competitors do not that can give you leverage in the market?

Before you start writing your positioning statement, you need to spend some time evaluating the current market conditions. Here are some questions that can help you to evaluate the market

• What are the unique features or benefits that you offer that your competitors lack?
• What are your customers’ primary needs and wants?
• Why should a customer choose you over your competition? How do you plan to differentiate yourself from the competition?
• How does your company’s solution compare with other solutions in the market?

After answering these questions, then you can start writing your positioning statement. Your positioning statement does not have to be in-depth or too long.

All you need to explain with your positioning statement are two focus areas. The first is the position of your company within the competitive landscape. The other focus area is the core value proposition that sets your company apart from other alternatives that your ideal customer might consider.

Here is a simple template you can use to develop a positioning statement.

For [description of target market] who [need of target market], [product or service] [how it meets the need]. Unlike [top competition], it [most essential distinguishing feature].

For example, let’s create the positioning statement for fictional accounting software and QuickBooks alternative , TBooks.

“For small business owners who need accounting services, TBooks is an accounting software that helps small businesses handle their small business bookkeeping basics quickly and easily. Unlike Wave, TBooks gives small businesses access to live sessions with top accountants.”

You can edit this positioning statement sample and fill it with your business details.

After writing your positioning statement, the next step is the pricing of your offerings. The overall positioning strategy you set in your positioning statement will often determine how you price your products or services.

Pricing is a powerful tool that sends a strong message to your customers. Failure to get your pricing strategy right can make or mar your business. If you are targeting a low-income audience, setting a premium price can result in low sales.

You can use pricing to communicate your positioning to your customers. For example, if you are offering a product at a premium price, you are sending a message to your customers that the product belongs to the premium category.

Basic Rules to Follow When Pricing Your Offering

Setting a price for your offering involves more than just putting a price tag on it. Deciding on the right pricing for your offering requires following some basic rules. They include covering your costs, primary and secondary profit center pricing, and matching the market rate.

• Covering Your Costs: The price you set for your products or service should be more than it costs you to produce and deliver them. Every business has the same goal, to make a profit. Depending on the strategy you want to use, there are exceptions to this rule. However, the vast majority of businesses follow this rule.
• Primary and Secondary Profit Center Pricing: When a company sets its price above the cost of production, it is making that product its primary profit center. A company can also decide not to make its initial price its primary profit center by selling below or at even with its production cost. It rather depends on the support product or even maintenance that is associated with the initial purchase to make its profit. The initial price thus became its secondary profit center.
• Matching the Market Rate: A good rule to follow when pricing your products or services is to match your pricing with consumer demand and expectations. If you price your products or services beyond the price your customer perceives as the ideal price range, you may end up with no customers. Pricing your products too low below what your customer perceives as the ideal price range may lead to them undervaluing your offering.

Pricing Strategy

Your pricing strategy influences the price of your offering. There are several pricing strategies available for you to choose from when examining the right pricing strategy for your business. They include cost-plus pricing, market-based pricing, value pricing, and more.

• Cost-plus Pricing: This strategy is one of the simplest and oldest pricing strategies. Here you consider the cost of producing a unit of your product and then add a profit to it to arrive at your market price. It is an effective pricing strategy for manufacturers because it helps them cover their initial costs. Another name for the cost-plus pricing strategy is the markup pricing strategy.
• Market-based Pricing: This pricing strategy analyses the market including competitors’ pricing and then sets a price based on what the market is expecting. With this pricing strategy, you can either set your price at the low-end or high-end of the market.
• Value Pricing: This pricing strategy involves setting a price based on the value you are providing to your customer. When adopting a value-based pricing strategy, you have to set a price that your customers are willing to pay. Service-based businesses such as small business insurance providers , luxury goods sellers, and the fashion industry use this pricing strategy.

After carefully sorting out your positioning statement and pricing, the next item to look at is your promotional strategy. Your promotional strategy explains how you plan on communicating with your customers and prospects.

As a business, you must measure all your costs, including the cost of your promotions. You also want to measure how much sales your promotions bring for your business to determine its usefulness. Promotional strategies or programs that do not lead to profit need to be removed.

There are different types of promotional strategies you can adopt for your business, they include advertising, public relations, and content marketing.

Advertising

Your business plan should include your advertising plan which can be found in the marketing and sales plan section. You need to include an overview of your advertising plans such as the areas you plan to spend money on to advertise your business and offers.

Ensure that you make it clear in this section if your business will be advertising online or using the more traditional offline media, or the combination of both online and offline media. You can also include the advertising medium you want to use to raise awareness about your business and offers.

Some common online advertising mediums you can use include social media ads, landing pages, sales pages, SEO, Pay-Per-Click, emails, Google Ads, and others. Some common traditional and offline advertising mediums include word of mouth, radios, direct mail, televisions, flyers, billboards, posters, and others.

A key component of your advertising strategy is how you plan to measure the effectiveness and success of your advertising campaign. There is no point in sticking with an advertising plan or medium that does not produce results for your business in the long run.

Public Relations

A great way to reach your customers is to get the media to cover your business or product. Publicity, especially good ones, should be a part of your marketing and sales plan. In this section, show your plans for getting prominent reviews of your product from reputable publications and sources.

Your business needs that exposure to grow. If public relations is a crucial part of your promotional strategy, provide details about your public relations plan here.

Content Marketing

Content marketing is a popular promotional strategy used by businesses to inform and attract their customers. It is about teaching and educating your prospects on various topics of interest in your niche, it does not just involve informing them about the benefits and features of the products and services you have,

Businesses publish content usually for free where they provide useful information, tips, and advice so that their target market can be made aware of the importance of their products and services. Content marketing strategies seek to nurture prospects into buyers over time by simply providing value.

Your company can create a blog where it will be publishing content for its target market. You will need to use the best website builder such as Wix and Squarespace and the best web hosting services such as Bluehost, Hostinger, and other Bluehost alternatives to create a functional blog or website.

If content marketing is a crucial part of your promotional strategy (as it should be), detail your plans under promotions.

Including high-quality images of the packaging of your product in your business plan is a lovely idea. You can add the images of the packaging of that product in the marketing and sales plan section. If you are not selling a product, then you do not need to include any worry about the physical packaging of your product.

When organizing the packaging section of your business plan, you can answer the following questions to make maximum use of this section.

• Is your choice of packaging consistent with your positioning strategy?
• What key value proposition does your packaging communicate? (It should reflect the key value proposition of your business)
• How does your packaging compare to that of your competitors?

Social Media

Your 21st-century business needs to have a good social media presence. Not having one is leaving out opportunities for growth and reaching out to your prospect.

You do not have to join the thousands of social media platforms out there. What you need to do is join the ones that your customers are active on and be active there.

Businesses use social media to provide information about their products such as promotions, discounts, the benefits of their products, and content on their blogs.

Social media is also a platform for engaging with your customers and getting feedback about your products or services. Make no mistake, more and more of your prospects are using social media channels to find more information about companies.

You need to consider the social media channels you want to prioritize your business (prioritize the ones your customers are active in) and your branding plans in this section.

Strategic Alliances

If your company plans to work closely with other companies as part of your sales and marketing plan, include it in this section. Prove details about those partnerships in your business plan if you have already established them.

Strategic alliances can be beneficial for all parties involved including your company. Working closely with another company in the form of a partnership can provide access to a different target market segment for your company.

The company you are partnering with may also gain access to your target market or simply offer a new product or service (that of your company) to its customers.

Mutually beneficial partnerships can cover the weaknesses of one company with the strength of another. You should consider strategic alliances with companies that sell complimentary products to yours. For example, if you provide printers, you can partner with a company that produces ink since the customers that buy printers from you will also need inks for printing.

Steps Involved in Creating a Marketing and Sales Plan

1. Focus on Your Target Market

Identify who your customers are, the market you want to target. Then determine the best ways to get your products or services to your potential customers.

2. Evaluate Your Competition

One of the goals of having a marketing plan is to distinguish yourself from your competition. You cannot stand out from them without first knowing them in and out.

You can know your competitors by gathering information about their products, pricing, service, and advertising campaigns.

These questions can help you know your competition.

• What makes your competition successful?
• What are their weaknesses?
• What are customers saying about your competition?

3. Consider Your Brand

Customers' perception of your brand has a strong impact on your sales. Your marketing and sales plan should seek to bolster the image of your brand. Before you start marketing your business, think about the message you want to pass across about your business and your products and services.

4. Focus on Benefits

The majority of your customers do not view your product in terms of features, what they want to know is the benefits and solutions your product offers. Think about the problems your product solves and the benefits it delivers, and use it to create the right sales and marketing message.

Your marketing plan should focus on what you want your customer to get instead of what you provide. Identify those benefits in your marketing and sales plan.

5. Focus on Differentiation

Your marketing and sales plan should look for a unique angle they can take that differentiates your business from the competition, even if the products offered are similar. Some good areas of differentiation you can use are your benefits, pricing, and features.

Key Questions to Answer When Writing Your Marketing and Sales Plan

• What is your company’s budget for sales and marketing campaigns?
• What key metrics will you use to determine if your marketing plans are successful?
• What are your alternatives if your initial marketing efforts do not succeed?
• Who are the sales representatives you need to promote your products or services?
• What are the marketing and sales channels you plan to use? How do you plan to get your products in front of your ideal customers?
• Where will you sell your products?

You may want to include samples of marketing materials you plan to use such as print ads, website descriptions, and social media ads. While it is not compulsory to include these samples, it can help you better communicate your marketing and sales plan and objectives.

The purpose of the marketing and sales section is to answer this question “How will you reach your customers?” If you cannot convincingly provide an answer to this question, you need to rework your marketing and sales section.

7. Clearly Show Your Funding Request

If you are writing your business plan to ask for funding from investors or financial institutions, the funding request section is where you will outline your funding requirements. The funding request section should answer the question ‘How much money will your business need in the near future (3 to 5 years)?’

A good funding request section will clearly outline and explain the amount of funding your business needs over the next five years. You need to know the amount of money your business needs to make an accurate funding request.

Also, when writing your funding request, provide details of how the funds will be used over the period. Specify if you want to use the funds to buy raw materials or machinery, pay salaries, pay for advertisements, and cover specific bills such as rent and electricity.

In addition to explaining what you want to use the funds requested for, you need to clearly state the projected return on investment (ROI) . Investors and creditors want to know if your business can generate profit for them if they put funds into it.

Ensure you do not inflate the figures and stay as realistic as possible. Investors and financial institutions you are seeking funds from will do their research before investing money in your business.

If you are not sure of an exact number to request from, you can use some range of numbers as rough estimates. Add a best-case scenario and a work-case scenario to your funding request. Also, include a description of your strategic future financial plans such as selling your business or paying off debts.

Funding Request: Debt or Equity?

When making your funding request, specify the type of funding you want. Do you want debt or equity? Draw out the terms that will be applicable for the funding, and the length of time the funding request will cover.

Case for Equity

If your new business has not yet started generating profits, you are most likely preparing to sell equity in your business to raise capital at the early stage. Equity here refers to ownership. In this case, you are selling a portion of your company to raise capital.

Although this method of raising capital for your business does not put your business in debt, keep in mind that an equity owner may expect to play a key role in company decisions even if he does not hold a major stake in the company.

Most equity sales for startups are usually private transactions . If you are making a funding request by offering equity in exchange for funding, let the investor know that they will be paid a dividend (a share of the company’s profit). Also, let the investor know the process for selling their equity in your business.

Case for Debt

You may decide not to offer equity in exchange for funds, instead, you make a funding request with the promise to pay back the money borrowed at the agreed time frame.

When making a funding request with an agreement to pay back, note that you will have to repay your creditors both the principal amount borrowed and the interest on it. Financial institutions offer this type of funding for businesses.

Large companies combine both equity and debt in their capital structure. When drafting your business plan, decide if you want to offer both or one over the other.

Before you sell equity in exchange for funding in your business, consider if you are willing to accept not being in total control of your business. Also, before you seek loans in your funding request section, ensure that the terms of repayment are favorable.

You should set a clear timeline in your funding request so that potential investors and creditors can know what you are expecting. Some investors and creditors may agree to your funding request and then delay payment for longer than 30 days, meanwhile, your business needs an immediate cash injection to operate efficiently.

Additional Tips for Writing the Funding Request Section of your Business Plan

The funding request section is not necessary for every business, it is only needed by businesses who plan to use their business plan to secure funding.

If you are adding the funding request section to your business plan, provide an itemized summary of how you plan to use the funds requested. Hiring a lawyer, accountant, or other professionals may be necessary for the proper development of this section.

You should also gather and use financial statements that add credibility and support to your funding requests. Ensure that the financial statements you use should include your projected financial data such as projected cash flows, forecast statements, and expenditure budgets.

If you are an existing business, include all historical financial statements such as cash flow statements, balance sheets and income statements .

Provide monthly and quarterly financial statements for a year. If your business has records that date back beyond the one-year mark, add the yearly statements of those years. These documents are for the appendix section of your business plan.

8. Detail Your Financial Plan, Metrics, and Projections

If you used the funding request section in your business plan, supplement it with a financial plan, metrics, and projections. This section paints a picture of the past performance of your business and then goes ahead to make an informed projection about its future.

The goal of this section is to convince readers that your business is going to be a financial success. It outlines your business plan to generate enough profit to repay the loan (with interest if applicable) and to generate a decent return on investment for investors.

If you have an existing business already in operation, use this section to demonstrate stability through finance. This section should include your cash flow statements, balance sheets, and income statements covering the last three to five years. If your business has some acceptable collateral that you can use to acquire loans, list it in the financial plan, metrics, and projection section.

Apart from current financial statements, this section should also contain a prospective financial outlook that spans the next five years. Include forecasted income statements, cash flow statements, balance sheets, and capital expenditure budget.

If your business is new and is not yet generating profit, use clear and realistic projections to show the potentials of your business.

When drafting this section, research industry norms and the performance of comparable businesses. Your financial projections should cover at least five years. State the logic behind your financial projections. Remember you can always make adjustments to this section as the variables change.

The financial plan, metrics, and projection section create a baseline which your business can either exceed or fail to reach. If your business fails to reach your projections in this section, you need to understand why it failed.

Investors and loan managers spend a lot of time going through the financial plan, metrics, and projection section compared to other parts of the business plan. Ensure you spend time creating credible financial analyses for your business in this section.

Many entrepreneurs find this section daunting to write. You do not need a business degree to create a solid financial forecast for your business. Business finances, especially for startups, are not as complicated as they seem. There are several online tools and templates that make writing this section so much easier.

Use Graphs and Charts

The financial plan, metrics, and projection section is a great place to use graphs and charts to tell the financial story of your business. Charts and images make it easier to communicate your finances.

Accuracy in this section is key, ensure you carefully analyze your past financial statements properly before making financial projects.

Address the Risk Factors and Show Realistic Financial Projections

Keep your financial plan, metrics, and projection realistic. It is okay to be optimistic in your financial projection, however, you have to justify it.

You should also address the various risk factors associated with your business in this section. Investors want to know the potential risks involved, show them. You should also show your plans for mitigating those risks.

What You Should In The Financial Plan, Metrics, and Projection Section of Your Business Plan

The financial plan, metrics, and projection section of your business plan should have monthly sales and revenue forecasts for the first year. It should also include annual projections that cover 3 to 5 years.

A three-year projection is a basic requirement to have in your business plan. However, some investors may request a five-year forecast.

Your business plan should include the following financial statements: sales forecast, personnel plan, income statement, income statement, cash flow statement, balance sheet, and an exit strategy.

1. Sales Forecast

Sales forecast refers to your projections about the number of sales your business is going to record over the next few years. It is typically broken into several rows, with each row assigned to a core product or service that your business is offering.

One common mistake people make in their business plan is to break down the sales forecast section into long details. A sales forecast should forecast the high-level details.

For example, if you are forecasting sales for a payroll software provider, you could break down your forecast into target market segments or subscription categories.

Your sales forecast section should also have a corresponding row for each sales row to cover the direct cost or Cost of Goods Sold (COGS). The objective of these rows is to show the expenses that your business incurs in making and delivering your product or service.

Note that your Cost of Goods Sold (COGS) should only cover those direct costs incurred when making your products. Other indirect expenses such as insurance, salaries, payroll tax, and rent should not be included.

For example, the Cost of Goods Sold (COGS) for a restaurant is the cost of ingredients while for a consulting company it will be the cost of paper and other presentation materials.

2. Personnel Plan

The personnel plan section is where you provide details about the payment plan for your employees. For a small business, you can easily list every position in your company and how much you plan to pay in the personnel plan.

However, for larger businesses, you have to break the personnel plan into functional groups such as sales and marketing.

The personnel plan will also include the cost of an employee beyond salary, commonly referred to as the employee burden. These costs include insurance, payroll taxes , and other essential costs incurred monthly as a result of having employees on your payroll.

3. Income Statement

The income statement section shows if your business is making a profit or taking a loss. Another name for the income statement is the profit and loss (P&L). It takes data from your sales forecast and personnel plan and adds other ongoing expenses you incur while running your business.

Every business plan should have an income statement. It subtracts your business expenses from its earnings to show if your business is generating profit or incurring losses.

The income statement has the following items: sales, Cost of Goods Sold (COGS), gross margin, operating expenses, total operating expenses, operating income , total expenses, and net profit.

• Sales refer to the revenue your business generates from selling its products or services. Other names for sales are income or revenue.
• Cost of Goods Sold (COGS) refers to the total cost of selling your products. Other names for COGS are direct costs or cost of sales. Manufacturing businesses use the Costs of Goods Manufactured (COGM) .
• Gross Margin is the figure you get when you subtract your COGS from your sales. In your income statement, you can express it as a percentage of total sales (Gross margin / Sales = Gross Margin Percent).
• Operating Expenses refer to all the expenses you incur from running your business. It exempts the COGS because it stands alone as a core part of your income statement. You also have to exclude taxes, depreciation, and amortization. Your operating expenses include salaries, marketing expenses, research and development (R&D) expenses, and other expenses.
• Total Operating Expenses refers to the sum of all your operating expenses including those exemptions named above under operating expenses.
• Operating Income refers to earnings before interest, taxes, depreciation, and amortization. It is simply known as the acronym EBITDA (earnings before interest, taxes, depreciation, and amortization). Calculating your operating income is simple, all you need to do is to subtract your COGS and total operating expenses from your sales.
• Total Expenses refer to the sum of your operating expenses and your business’ interest, taxes, depreciation, and amortization.
• Net profit shows whether your business has made a profit or taken a loss during a given timeframe.

4. Cash Flow Statement

The cash flow statement tracks the money you have in the bank at any given point. It is often confused with the income statement or the profit and loss statement. They are both different types of financial statements. The income statement calculates your profits and losses while the cash flow statement shows you how much you have in the bank.

5. Balance Sheet

The balance sheet is a financial statement that provides an overview of the financial health of your business. It contains information about the assets and liabilities of your company, and owner’s or shareholders’ equity.

You can get the net worth of your company by subtracting your company’s liabilities from its assets.

6. Exit Strategy

The exit strategy refers to a probable plan for selling your business either to the public in an IPO or to another company. It is the last thing you include in the financial plan, metrics, and projection section.

You can choose to omit the exit strategy from your business plan if you plan to maintain full ownership of your business and do not plan on seeking angel investment or virtual capitalist (VC) funding.

Investors may want to know what your exit plan is. They invest in your business to get a good return on investment.

Your exit strategy does not have to include long and boring details. Ensure you identify some interested parties who may be interested in buying the company if it becomes a success.

Key Questions to Answer with Your Financial Plan, Metrics, and Projection

Your financial plan, metrics, and projection section helps investors, creditors, or your internal managers to understand what your expenses are, the amount of cash you need, and what it takes to make your company profitable. It also shows what you will be doing with any funding.

You do not need to show actual financial data if you do not have one. Adding forecasts and projections to your financial statements is added proof that your strategy is feasible and shows investors you have planned properly.

Here are some key questions to answer to help you develop this section.

• What is your sales forecast for the next year?
• When will your company achieve a positive cash flow?
• What are the core expenses you need to operate?
• How much money do you need upfront to operate or grow your company?
• How will you use the loans or investments?

9. Add an Appendix to Your Business Plan

Adding an appendix to your business plan is optional. It is a useful place to put any charts, tables, legal notes, definitions, permits, résumés, and other critical information that do not fit into other sections of your business plan.

The appendix section is where you would want to include details of a patent or patent-pending if you have one. You can always add illustrations or images of your products here. It is the last section of your business plan.

When writing your business plan, there are details you cut short or remove to prevent the entire section from becoming too lengthy. There are also details you want to include in the business plan but are not a good fit for any of the previous sections. You can add that additional information to the appendix section.

Businesses also use the appendix section to include supporting documents or other materials specially requested by investors or lenders.

You can include just about any information that supports the assumptions and statements you made in the business plan under the appendix. It is the one place in the business plan where unrelated data and information can coexist amicably.

If your appendix section is lengthy, try organizing it by adding a table of contents at the beginning of the appendix section. It is also advisable to group similar information to make it easier for the reader to access them.

A well-organized appendix section makes it easier to share your information clearly and concisely. Add footnotes throughout the rest of the business plan or make references in the plan to the documents in the appendix.

The appendix section is usually only necessary if you are seeking funding from investors or lenders, or hoping to attract partners.

People reading business plans do not want to spend time going through a heap of backup information, numbers, and charts. Keep these documents or information in the Appendix section in case the reader wants to dig deeper.

Common Items to Include in the Appendix Section of Your Business Plan

The appendix section includes documents that supplement or support the information or claims given in other sections of the business plans. Common items you can include in the appendix section include:

• Additional data about the process of manufacturing or creation
• Additional description of products or services such as product schematics
• Additional financial documents or projections
• Articles of incorporation and status
• Backup for market research or competitive analysis
• Bank statements
• Business registries
• Client testimonials (if your business is already running)
• Copies of insurances
• Credit histories (personal or/and business)
• Deeds and permits
• Equipment leases
• Examples of marketing and advertising collateral
• Industry associations and memberships
• Images of product
• Intellectual property
• Key customer contracts
• Legal documents and other contracts
• Letters of reference
• Links to references
• Market research data
• Organizational charts
• Photographs of potential facilities
• Professional licenses pertaining to your legal structure or type of business
• Purchase orders
• Resumes of the founder(s) and key managers
• State and federal identification numbers or codes
• Trademarks or patents’ registrations

Avoid using the appendix section as a place to dump any document or information you feel like adding. Only add documents or information that you support or increase the credibility of your business plan.

Tips and Strategies for Writing a Convincing Business Plan

To achieve a perfect business plan, you need to consider some key tips and strategies. These tips will raise the efficiency of your business plan above average.

1. Know Your Audience

When writing a business plan, you need to know your audience . Business owners write business plans for different reasons. Your business plan has to be specific. For example, you can write business plans to potential investors, banks, and even fellow board members of the company.

The audience you are writing to determines the structure of the business plan. As a business owner, you have to know your audience. Not everyone will be your audience. Knowing your audience will help you to narrow the scope of your business plan.

Consider what your audience wants to see in your projects, the likely questions they might ask, and what interests them.

• A business plan used to address a company's board members will center on its employment schemes, internal affairs, projects, stakeholders, etc.
• A business plan for financial institutions will talk about the size of your market and the chances for you to pay back any loans you demand.
• A business plan for investors will show proof that you can return the investment capital within a specific time. In addition, it discusses your financial projections, tractions, and market size.

2. Get Inspiration from People

Writing a business plan from scratch as an entrepreneur can be daunting. That is why you need the right inspiration to push you to write one. You can gain inspiration from the successful business plans of other businesses. Look at their business plans, the style they use, the structure of the project, etc.

To make your business plan easier to create, search companies related to your business to get an exact copy of what you need to create an effective business plan. You can also make references while citing examples in your business plans.

When drafting your business plan, get as much help from others as you possibly can. By getting inspiration from people, you can create something better than what they have.

3. Avoid Being Over Optimistic

Many business owners make use of strong adjectives to qualify their content. One of the big mistakes entrepreneurs make when preparing a business plan is promising too much.

The use of superlatives and over-optimistic claims can prepare the audience for more than you can offer. In the end, you disappoint the confidence they have in you.

In most cases, the best option is to be realistic with your claims and statistics. Most of the investors can sense a bit of incompetency from the overuse of superlatives. As a new entrepreneur, do not be tempted to over-promise to get the interests of investors.

The concept of entrepreneurship centers on risks, nothing is certain when you make future analyses. What separates the best is the ability to do careful research and work towards achieving that, not promising more than you can achieve.

To make an excellent first impression as an entrepreneur, replace superlatives with compelling data-driven content. In this way, you are more specific than someone promising a huge ROI from an investment.

4. Keep it Simple and Short

When writing business plans, ensure you keep them simple throughout. Irrespective of the purpose of the business plan, your goal is to convince the audience.

One way to achieve this goal is to make them understand your proposal. Therefore, it would be best if you avoid the use of complex grammar to express yourself. It would be a huge turn-off if the people you want to convince are not familiar with your use of words.

Another thing to note is the length of your business plan. It would be best if you made it as brief as possible.

You hardly see investors or agencies that read through an extremely long document. In that case, if your first few pages can’t convince them, then you have lost it. The more pages you write, the higher the chances of you derailing from the essential contents.

To ensure your business plan has a high conversion rate, you need to dispose of every unnecessary information. For example, if you have a strategy that you are not sure of, it would be best to leave it out of the plan.

5. Make an Outline and Follow Through

A perfect business plan must have touched every part needed to convince the audience. Business owners get easily tempted to concentrate more on their products than on other sections. Doing this can be detrimental to the efficiency of the business plan.

For example, imagine you talking about a product but omitting or providing very little information about the target audience. You will leave your clients confused.

To ensure that your business plan communicates your full business model to readers, you have to input all the necessary information in it. One of the best ways to achieve this is to design a structure and stick to it.

This structure is what guides you throughout the writing. To make your work easier, you can assign an estimated word count or page limit to every section to avoid making it too bulky for easy reading. As a guide, the necessary things your business plan must contain are:

• Table of contents
• Introduction
• Product or service description
• Target audience
• Market size
• Competition analysis
• Financial projections

Some specific businesses can include some other essential sections, but these are the key sections that must be in every business plan.

6. Ask a Professional to Proofread

When writing a business plan, you must tie all loose ends to get a perfect result. When you are done with writing, call a professional to go through the document for you. You are bound to make mistakes, and the way to correct them is to get external help.

You should get a professional in your field who can relate to every section of your business plan. It would be easier for the professional to notice the inner flaws in the document than an editor with no knowledge of your business.

In addition to getting a professional to proofread, get an editor to proofread and edit your document. The editor will help you identify grammatical errors, spelling mistakes, and inappropriate writing styles.

Writing a business plan can be daunting, but you can surmount that obstacle and get the best out of it with these tips.

Business Plan Examples and Templates That’ll Save You Tons of Time

1. hubspot's one-page business plan.

The one-page business plan template by HubSpot is the perfect guide for businesses of any size, irrespective of their business strategy. Although the template is condensed into a page, your final business plan should not be a page long! The template is designed to ask helpful questions that can help you develop your business plan.

Hubspot’s one-page business plan template is divided into nine fields:

• Business opportunity
• Company description
• Industry analysis
• Target market
• Implementation timeline
• Marketing plan
• Financial summary
• Funding required

2. Bplan’s Free Business Plan Template

Bplans' free business plan template is investor-approved. It is a rich template used by prestigious educational institutions such as Babson College and Princeton University to teach entrepreneurs how to create a business plan.

The template has six sections: the executive summary, opportunity, execution, company, financial plan, and appendix. There is a step-by-step guide for writing every little detail in the business plan. Follow the instructions each step of the way and you will create a business plan that impresses investors or lenders easily.

3. HubSpot's Downloadable Business Plan Template

HubSpot’s downloadable business plan template is a more comprehensive option compared to the one-page business template by HubSpot. This free and downloadable business plan template is designed for entrepreneurs.

The template is a comprehensive guide and checklist for business owners just starting their businesses. It tells you everything you need to fill in each section of the business plan and how to do it.

There are nine sections in this business plan template: an executive summary, company and business description, product and services line, market analysis, marketing plan, sales plan, legal notes, financial considerations, and appendix.

4. Business Plan by My Own Business Institute

My Own Business Institute (MOBI) which is a part of Santa Clara University's Center for Innovation and Entrepreneurship offers a free business plan template. You can either copy the free business template from the link provided above or download it as a Word document.

The comprehensive template consists of a whopping 15 sections.

• The Business Profile
• The Vision and the People
• Home-Based Business and Freelance Business Opportunities
• Organization
• Licenses and Permits
• Business Insurance
• Communication Tools
• Acquisitions
• Location and Leasing
• Accounting and Cash Flow
• Opening and Marketing
• Managing Employees
• Expanding and Handling Problems

There are lots of helpful tips on how to fill each section in the free business plan template by MOBI.

5. Score's Business Plan Template for Startups

Score is an American nonprofit organization that helps entrepreneurs build successful companies. This business plan template for startups by Score is available for free download. The business plan template asks a whooping 150 generic questions that help entrepreneurs from different fields to set up the perfect business plan.

The business plan template for startups contains clear instructions and worksheets, all you have to do is answer the questions and fill the worksheets.

There are nine sections in the business plan template: executive summary, company description, products and services, marketing plan, operational plan, management and organization, startup expenses and capitalization, financial plan, and appendices.

The ‘refining the plan’ resource contains instructions that help you modify your business plan to suit your specific needs, industry, and target audience. After you have completed Score’s business plan template, you can work with a SCORE mentor for expert advice in business planning.

6. Minimalist Architecture Business Plan Template by Venngage

The minimalist architecture business plan template is a simple template by Venngage that you can customize to suit your business needs .

There are five sections in the template: an executive summary, statement of problem, approach and methodology, qualifications, and schedule and benchmark. The business plan template has instructions that guide users on what to fill in each section.

7. Small Business Administration Free Business Plan Template

The Small Business Administration (SBA) offers two free business plan templates, filled with practical real-life examples that you can model to create your business plan. Both free business plan templates are written by fictional business owners: Rebecca who owns a consulting firm, and Andrew who owns a toy company.

There are five sections in the two SBA’s free business plan templates.

• Executive Summary
• Company Description
• Service Line
• Marketing and Sales

8. The $100 Startup's One-Page Business Plan

The one-page business plan by the $100 startup is a simple business plan template for entrepreneurs who do not want to create a long and complicated plan . You can include more details in the appendices for funders who want more information beyond what you can put in the one-page business plan.

There are five sections in the one-page business plan such as overview, ka-ching, hustling, success, and obstacles or challenges or open questions. You can answer all the questions using one or two sentences.

9. PandaDoc’s Free Business Plan Template

The free business plan template by PandaDoc is a comprehensive 15-page document that describes the information you should include in every section.

There are 11 sections in PandaDoc’s free business plan template.

• Executive summary
• Business description
• Products and services
• Operations plan
• Management organization
• Financial plan
• Conclusion / Call to action
• Confidentiality statement

You have to sign up for its 14-day free trial to access the template. You will find different business plan templates on PandaDoc once you sign up (including templates for general businesses and specific businesses such as bakeries, startups, restaurants, salons, hotels, and coffee shops)

PandaDoc allows you to customize its business plan templates to fit the needs of your business. After editing the template, you can send it to interested parties and track opens and views through PandaDoc.

10. Invoiceberry Templates for Word, Open Office, Excel, or PPT

InvoiceBerry is a U.K based online invoicing and tracking platform that offers free business plan templates in .docx, .odt, .xlsx, and .pptx formats for freelancers and small businesses.

Before you can download the free business plan template, it will ask you to give it your email address. After you complete the little task, it will send the download link to your inbox for you to download. It also provides a business plan checklist in .xlsx file format that ensures you add the right information to the business plan.

Alternatives to the Traditional Business Plan

A business plan is very important in mapping out how one expects their business to grow over a set number of years, particularly when they need external investment in their business. However, many investors do not have the time to watch you present your business plan. It is a long and boring read.

Luckily, there are three alternatives to the traditional business plan (the Business Model Canvas, Lean Canvas, and Startup Pitch Deck). These alternatives are less laborious and easier and quicker to present to investors.

Business Model Canvas (BMC)

The business model canvas is a business tool used to present all the important components of setting up a business, such as customers, route to market, value proposition, and finance in a single sheet. It provides a very focused blueprint that defines your business initially which you can later expand on if needed.

The sheet is divided mainly into company, industry, and consumer models that are interconnected in how they find problems and proffer solutions.

Segments of the Business Model Canvas

The business model canvas was developed by founder Alexander Osterwalder to answer important business questions. It contains nine segments.

• Key Partners: Who will be occupying important executive positions in your business? What do they bring to the table? Will there be a third party involved with the company?
• Key Activities: What important activities will production entail? What activities will be carried out to ensure the smooth running of the company?
• The Product’s Value Propositions: What does your product do? How will it be different from other products?
• Customer Segments: What demography of consumers are you targeting? What are the habits of these consumers? Who are the MVPs of your target consumers?
• Customer Relationships: How will the team support and work with its customer base? How do you intend to build and maintain trust with the customer?
• Key Resources: What type of personnel and tools will be needed? What size of the budget will they need access to?
• Channels: How do you plan to create awareness of your products? How do you intend to transport your product to the customer?
• Cost Structure: What is the estimated cost of production? How much will distribution cost?
• Revenue Streams: For what value are customers willing to pay? How do they prefer to pay for the product? Are there any external revenues attached apart from the main source? How do the revenue streams contribute to the overall revenue?

Lean Canvas

The lean canvas is a problem-oriented alternative to the standard business model canvas. It was proposed by Ash Maurya, creator of Lean Stack as a development of the business model generation. It uses a more problem-focused approach and it majorly targets entrepreneurs and startup businesses.

Lean Canvas uses the same 9 blocks concept as the business model canvas, however, they have been modified slightly to suit the needs and purpose of a small startup. The key partners, key activities, customer relationships, and key resources are replaced by new segments which are:

• Problem: Simple and straightforward number of problems you have identified, ideally three.
• Solution: The solutions to each problem.
• Unfair Advantage: Something you possess that can't be easily bought or replicated.
• Key Metrics: Important numbers that will tell how your business is doing.

Startup Pitch Deck

While the business model canvas compresses into a factual sheet, startup pitch decks expand flamboyantly.

Pitch decks, through slides, convey your business plan, often through graphs and images used to emphasize estimations and observations in your presentation. Entrepreneurs often use pitch decks to fully convince their target audience of their plans before discussing funding arrangements.

Considering the likelihood of it being used in a small time frame, a good startup pitch deck should ideally contain 20 slides or less to have enough time to answer questions from the audience.

Unlike the standard and lean business model canvases, a pitch deck doesn't have a set template on how to present your business plan but there are still important components to it. These components often mirror those of the business model canvas except that they are in slide form and contain more details.

Using Airbnb (one of the most successful start-ups in recent history) for reference, the important components of a good slide are listed below.

• Cover/Introduction Slide: Here, you should include your company's name and mission statement. Your mission statement should be a very catchy tagline. Also, include personal information and contact details to provide an easy link for potential investors.
• Problem Slide: This slide requires you to create a connection with the audience or the investor that you are pitching. For example in their pitch, Airbnb summarized the most important problems it would solve in three brief points – pricing of hotels, disconnection from city culture, and connection problems for local bookings.
• Solution Slide: This slide includes your core value proposition. List simple and direct solutions to the problems you have mentioned
• Customer Analysis: Here you will provide information on the customers you will be offering your service to. The identity of your customers plays an important part in fundraising as well as the long-run viability of the business.
• Market Validation: Use competitive analysis to show numbers that prove the presence of a market for your product, industry behavior in the present and the long run, as well as the percentage of the market you aim to attract. It shows that you understand your competitors and customers and convinces investors of the opportunities presented in the market.
• Business Model: Your business model is the hook of your presentation. It may vary in complexity but it should generally include a pricing system informed by your market analysis. The goal of the slide is to confirm your business model is easy to implement.
• Marketing Strategy: This slide should summarize a few customer acquisition methods that you plan to use to grow the business.
• Competitive Advantage: What this slide will do is provide information on what will set you apart and make you a more attractive option to customers. It could be the possession of technology that is not widely known in the market.
• Team Slide: Here you will give a brief description of your team. Include your key management personnel here and their specific roles in the company. Include their educational background, job history, and skillsets. Also, talk about their accomplishments in their careers so far to build investors' confidence in members of your team.
• Traction Slide: This validates the company’s business model by showing growth through early sales and support. The slide aims to reduce any lingering fears in potential investors by showing realistic periodic milestones and profit margins. It can include current sales, growth, valuable customers, pre-orders, or data from surveys outlining current consumer interest.
• Funding Slide: This slide is popularly referred to as ‘the ask'. Here you will include important details like how much is needed to get your business off the ground and how the funding will be spent to help the company reach its goals.
• Appendix Slides: Your pitch deck appendix should always be included alongside a standard pitch presentation. It consists of additional slides you could not show in the pitch deck but you need to complement your presentation.

It is important to support your calculations with pictorial renditions. Infographics, such as pie charts or bar graphs, will be more effective in presenting the information than just listing numbers. For example, a six-month graph that shows rising profit margins will easily look more impressive than merely writing it.

Lastly, since a pitch deck is primarily used to secure meetings and you may be sharing your pitch with several investors, it is advisable to keep a separate public version that doesn't include financials. Only disclose the one with projections once you have secured a link with an investor.

Advantages of the Business Model Canvas, Lean Canvas, and Startup Pitch Deck over the Traditional Business Plan

• Time-Saving: Writing a detailed traditional business plan could take weeks or months. On the other hand, all three alternatives can be done in a few days or even one night of brainstorming if you have a comprehensive understanding of your business.
• Easier to Understand: Since the information presented is almost entirely factual, it puts focus on what is most important in running the business. They cut away the excess pages of fillers in a traditional business plan and allow investors to see what is driving the business and what is getting in the way.
• Easy to Update: Businesses typically present their business plans to many potential investors before they secure funding. What this means is that you may regularly have to amend your presentation to update statistics or adjust to audience-specific needs. For a traditional business plan, this could mean rewriting a whole section of your plan. For the three alternatives, updating is much easier because they are not voluminous.
• Guide for a More In-depth Business Plan: All three alternatives have the added benefit of being able to double as a sketch of your business plan if the need to create one arises in the future.

Business Plan FAQ

Business plans are important for any entrepreneur who is looking for a framework to run their company over some time or seeking external support. Although they are essential for new businesses, every company should ideally have a business plan to track their growth from time to time.  They can be used by startups seeking investments or loans to convey their business ideas or an employee to convince his boss of the feasibility of starting a new project. They can also be used by companies seeking to recruit high-profile employee targets into key positions or trying to secure partnerships with other firms.

Business plans often vary depending on your target audience, the scope, and the goals for the plan. Startup plans are the most common among the different types of business plans.  A start-up plan is used by a new business to present all the necessary information to help get the business up and running. They are usually used by entrepreneurs who are seeking funding from investors or bank loans. The established company alternative to a start-up plan is a feasibility plan. A feasibility plan is often used by an established company looking for new business opportunities. They are used to show the upsides of creating a new product for a consumer base. Because the audience is usually company people, it requires less company analysis. The third type of business plan is the lean business plan. A lean business plan is a brief, straight-to-the-point breakdown of your ideas and analysis for your business. It does not contain details of your proposal and can be written on one page. Finally, you have the what-if plan. As it implies, a what-if plan is a preparation for the worst-case scenario. You must always be prepared for the possibility of your original plan being rejected. A good what-if plan will serve as a good plan B to the original.

A good business plan has 10 key components. They include an executive plan, product analysis, desired customer base, company analysis, industry analysis, marketing strategy, sales strategy, financial projection, funding, and appendix. Executive Plan Your business should begin with your executive plan. An executive plan will provide early insight into what you are planning to achieve with your business. It should include your mission statement and highlight some of the important points which you will explain later. Product Analysis The next component of your business plan is your product analysis. A key part of this section is explaining the type of item or service you are going to offer as well as the market problems your product will solve. Desired Consumer Base Your product analysis should be supplemented with a detailed breakdown of your desired consumer base. Investors are always interested in knowing the economic power of your market as well as potential MVP customers. Company Analysis The next component of your business plan is your company analysis. Here, you explain how you want to run your business. It will include your operational strategy, an insight into the workforce needed to keep the company running, and important executive positions. It will also provide a calculation of expected operational costs.  Industry Analysis A good business plan should also contain well laid out industry analysis. It is important to convince potential investors you know the companies you will be competing with, as well as your plans to gain an edge on the competition. Marketing Strategy Your business plan should also include your marketing strategy. This is how you intend to spread awareness of your product. It should include a detailed explanation of the company brand as well as your advertising methods. Sales Strategy Your sales strategy comes after the market strategy. Here you give an overview of your company's pricing strategy and how you aim to maximize profits. You can also explain how your prices will adapt to market behaviors. Financial Projection The financial projection is the next component of your business plan. It explains your company's expected running cost and revenue earned during the tenure of the business plan. Financial projection gives a clear idea of how your company will develop in the future. Funding The next component of your business plan is funding. You have to detail how much external investment you need to get your business idea off the ground here. Appendix The last component of your plan is the appendix. This is where you put licenses, graphs, or key information that does not fit in any of the other components.

The business model canvas is a business management tool used to quickly define your business idea and model. It is often used when investors need you to pitch your business idea during a brief window.

A pitch deck is similar to a business model canvas except that it makes use of slides in its presentation. A pitch is not primarily used to secure funding, rather its main purpose is to entice potential investors by selling a very optimistic outlook on the business.

Business plan competitions help you evaluate the strength of your business plan. By participating in business plan competitions, you are improving your experience. The experience provides you with a degree of validation while practicing important skills. The main motivation for entering into the competitions is often to secure funding by finishing in podium positions. There is also the chance that you may catch the eye of a casual observer outside of the competition. These competitions also provide good networking opportunities. You could meet mentors who will take a keen interest in guiding you in your business journey. You also have the opportunity to meet other entrepreneurs whose ideas can complement yours.

Exlore Further

• 12 Key Elements of a Business Plan (Top Components Explained)
• 13 Sources of Business Finance For Companies & Sole Traders
• 5 Common Types of Business Structures (+ Pros & Cons)
• How to Buy a Business in 8 Steps (+ Due Diligence Checklist)

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Profit Margin Calculator

Online profit margin calculator, providing calculations for net profit margin, net profit, and profit percentage.

Net Profit Margin:

Net profit:, profit percentage:, how to calculate profit margin percentage.

Calculating the profit margin percentage is an essential task for any business to understand its financial health and profitability. The profit margin percentage is a financial metric that indicates what percentage of sales has turned into profits. It's calculated by dividing the net profit (revenue minus expenses) by the revenue and then multiplying the result by 100 to get a percentage. To break it down: Calculate Net Profit : Start by subtracting all your business expenses from your total revenue. This difference is your net profit. Divide Net Profit by Revenue : Take your net profit and divide it by your total revenue. Convert to Percentage : Multiply the result from step two by 100. This final number is your profit margin percentage. ‍ For instance, if your business earns $200,000 in revenue and incurs $150,000 in expenses, your net profit is $50,000. Dividing $50,000 by $200,000 gives 0.25, and multiplying by 100 gives you a profit margin percentage of 25%. This simple yet powerful calculation provides insight into your business's operational efficiency and helps in strategic decision-making. To make this process even more straightforward, our Profit Margin Calculator automates these calculations, allowing you to focus on interpreting the results and planning for business growth. Just input your revenue and expenses, and let the tool do the rest!

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Learn more about profit margin calculations

What is Profit Margin? A Simple Introduction

Profit margin is the most essential financial ratio for monitoring the health of your business.

What's a Good Profit Margin for Your Small Business?

Like every small business owner, you're always seeking new ways to improve profitability. One way to do this is to focus on increasing your profit margin. But what is profit margin, and how do you calculate it?

Easy Formula to Calculate Markup & Margin

Small business owners often confuse profit margin and markup. Both of these metrics help a business set prices and measure profitability, but it’s important to know the difference—and know how to calculate the two numbers.

Frequently Asked Questions

Profit margin is a financial metric that measures the percentage of revenue that exceeds the costs and expenses involved in running a business. It illustrates how effectively a company converts sales into profits, indicating its financial health and operational efficiency. A higher profit margin means the business is managing its costs well and is more profitable.

Increasing your profit margin involves either boosting revenue while maintaining or reducing costs, or lowering costs without a corresponding decrease in revenue. Here are key strategies:

• Optimize Pricing : Review your pricing strategy. Increasing prices can improve margins if the market supports it and the perceived value aligns with the cost.
• Reduce Costs : Identify areas to cut costs, such as negotiating better terms with suppliers, reducing waste, or optimizing operational efficiencies.
• Improve Operational Efficiency : Streamline business processes and operations to reduce labor and production costs, and invest in technology that enhances productivity.
• Focus on High-Profit Products/Services : Analyze which products or services yield higher margins and focus your sales and marketing efforts on them.
• Enhance Customer Experience : A satisfied customer base can lead to repeat business and referrals, both of which can increase revenue without proportionately increasing costs.
• Expand Your Market : Explore new markets or customer segments that might be interested in your products or services.
• Control Inventory : Efficient inventory management can reduce holding costs and minimize losses from unsold stock.
• Optimize Your Marketing : Focus on cost-effective marketing strategies that target your ideal customers and yield a high return on investment.

Each business will have different opportunities and challenges, so it's important to analyze your specific situation and develop a tailored approach to improving your profit margin.

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How to calculate profit margin: definition and example.

Profit margin is an essential metric for assessing the income and health of a business. It tells business owners how much they take home after all their expenses and offers investors and shareholders a clear picture of the company’s success. 

Profit margins are also important for tracking growth and improving income. Changes in profit margin can suggest helpful methods for increasing sales or decreasing operating expenses.

In this article, we’ll explore what profit margin is, different types of profit margins, and how to calculate profit margins. We’ll also look at strategies for increasing profit margin so you can find effective ways to grow your small business.

Key Takeaways

• Profit margin measures a company’s income after costs have been deducted.
• Three types of profit margins are gross profits, operating profits, and net profits.
• Net profit margin is the most common and most comprehensive measurement.
• You can increase profit margin by increasing sales or decreasing expenses.

Table of Contents

What Is Profit Margin?

Types and formula for profit margin calculation.

• Examples of How to Calculate Profit Margin

How Do I Increase Profit Margins?

• Frequently Asked Questions

Profit margin is the total amount of revenue that a company keeps after they subtract all other expenses. It’s a common way to measure how much money the company makes and is often associated with growth potential. 

Profit margin is usually expressed as a percentage—for example, a 15% profit margin means that for every $1 your company brings in, you retain $0.15 as net revenue.

The most common type of profit margin calculator is net profit margin. This accounts for a company’s costs, including labor and taxes. Net profit margin offers a comprehensive way to compare your company’s sales to the total amount you keep as profit.

There are three main types of profit margins that businesses use to assess their success:

Gross Profit Margin

Gross profit margin is the most straightforward profit margin formula. It measures a company’s revenue after subtracting the cost of goods sold. This enables businesses to assess the basic relationship between their profits and the cost of one input. 

Gross profit margin may be helpful for businesses that are significantly impacted by materials costs. It also allows a company to compare its profits to similar businesses that sell the same product. They can then use this information to assess their efficiency and consider things like suppliers and marketing which may impact their gross profit margin.

The formula for gross profit margin is:

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

Gross profit margin is expressed as a percentage. Net sales refer to gross revenue after accounting for any returns, discounts, and other transactions that impact actual sales. To learn more about net sales, follow our guide on How to Calculate Net Sales , which explains what it is and how it’s calculated.

Operating Profit Margin

Operating profit margins can be considered the next level past the gross margin formula—it accounts for direct inputs like wages and cost of goods but does not include taxes or interest. To calculate operating profit margin, companies subtract the cost of inputs from total sales.

Operating profit margin can be a helpful indicator of the efficiency of your business. It accounts for all the day-to-day costs of running your business, including wages and administrative costs. By comparing your gross profit margin and operating profit margin, you can analyze how your day-to-day costs impact your profits.

The formula for operating profit margin is:

Operating Earnings = (Revenue – (Cost of Goods Sold + Wages + Administrative and General Costs)

Operating Margin = Operating Earnings / Revenue

Net Profit Margin

Net profit margin is the final revenue total after subtracting all costs. This includes wages, cost of goods sold, general and administrative costs, taxes, interest, and dividends paid to shareholders. 

Net profit margin is often called ‘the bottom line’ because it’s the final measurement after all expenditures. A positive net profit margin means your company is turning a profit; a negative net profit number means your costs exceed your revenues.

Calculating net profit margin is key to measuring the overall health of your business. Higher net profit margins mean your company is generating more profit per dollar of revenue.

The formula for net profit margin is:

Net Profit Margin = (Operating Earnings – (Taxes + Interest + Dividends)) / Revenue

Examples of How To Calculate Profit Margin

We’ll use an example to show how to calculate the gross margin, operating margin, and net profit margin for the same company.

Gross Profit Margin Example

Company A produces lawnmowers and generates $50,000 in net sales in a month. Its cost of goods sold was $20,000.

Gross profit margin = (50,000 – 20,000) / 50,000

Gross profit margin = 0.60

Company A has a gross profit margin of 60%.

Operating Profit Margin Example

To calculate the operating profit margin, we also include employee wages and administrative and general costs. This company paid its employees $5,000 in wages and had an additional $5,000 in administrative and general costs.

Operating earnings = (50,000 – (20,000 + 5,000 + 5,000)

Operating earnings = 20,000

Operating margin = operating earnings / revenue

Operating margin = 0.4

Company A has an operating profit margin of 40%.

Net Profit Margin Example

With operating earnings of $20,000, we now include taxes, interest, and shareholder dividends. They paid $6,000 in taxes, $500 in interest, and $800 in shareholder dividends.

Net profit margin = (20,000 – (6,000 + 500 + 800)) / 50,000

Net profit margin = 0.254

Company A has a net profit margin of 25.4%.

Achieving a higher profit margin is a common goal for businesses that want to expand and boost their income. There are two main ways to increase your profit margins: increasing your revenues or decreasing your expenses. We’ll look at different strategies businesses can use to address these factors.

Improve Your Marketing

Marketing can be an effective way to increase your client base to your total sales volume and boost revenue. However, it’s important to balance marketing costs against potential gains. Review your existing marketing strategy to see which elements generate leads and which drain your funds without delivering a large return.

Reassess Your Pricing Strategy

Pricing is key to revenue, but it can be difficult to find the perfect price. Pricing too high may lead to a decline in sales numbers, whereas pricing too low may result in a profit decrease even with a higher sales volume. Consider exploring competitor prices to see how you compare in the market. If you can’t match competitor prices, see whether you can compete by offering stronger service or better branding.

Analyze Product Performance

If your company offers a range of products, assess which ones generate the highest profit. This may not always be your best-selling product—instead, it’s the product with the best profit margin. Compare your sales to input prices to see which product brings in the greatest profit. You can also reach out to customers and perform customer satisfaction surveys to see if there’s anything you can improve about your products.

Streamline Operating Costs

If you discover you’re spending a lot on administrative and general costs, gather your team and brainstorm where you can boost efficiency. There may be a more affordable software product than your current one or you may be able to automate a part of your process. Improving efficiency can reduce the amount that you subtract from your total revenue.

Explore Your Tax Deductions

Many tax deductions for small business owners can reduce your total taxable income. Make sure you’re claiming all your deductions to minimize your tax bill and decrease the amount subtracted from your business revenue.

Profit margins are an important way to measure business health and track growth. You can use gross profits, operating profits, and net profit margin to assess different aspects of business profitability.

The right accounting system can help you track income and expenses and calculate profit margins. FreshBooks accounting software makes it easy to organize your sales and costs, track your expenses, and manage deductions. Try FreshBooks free to start streamlining your profit margin calculations.

FAQs About Calculating Profit Margin

Learn more about assessing profitability, profit margins for new businesses, and how to calculate profit margins with frequently asked questions.

How do you assess a company’s profitability?

Net profit margin is an effective way to assess a company’s profitability. It allows you to compare revenue and expenses and enables you to measure changes in productivity over time. However, net profit is not the sole indicator of a company’s profitability. Various other measures, such as profit per client and upcoming prospects, should also be considered when determining a company’s financial success. For a comprehensive understanding of these factors, you can check out our post on how to know if a company is profitable , where we have explained all of this in detail. It’s also important for demonstrating profitability to investors and shareholders.

What is a good profit margin for a new business?

Profit margins are industry-specific, so there’s no single desired profit margin percentage that’s good for all businesses. However, new businesses with a profit margin ranging from 7% to 10% are generally considered healthy. This profit margin should increase as the business grows.

How do you calculate the profit margin for a product?

You can calculate the gross profit margin for a product by subtracting the cost of goods sold from the net sales, and then dividing that by net sales. This will tell you the basic profit after subtracting the primary input price. 

How do you calculate profit margin per unit?

You can find the profit margin per unit by subtracting the cost of the goods sold from the sale price. This will tell you a simple profit measurement in whole numbers. You can divide this by the sale price, then multiply by 100 to get the profit margin per unit as a percentage.

Kristen Slavin, CPA

About the author

Kristen Slavin is a CPA with 16 years of experience, specializing in accounting, bookkeeping, and tax services for small businesses. A member of the CPA Association of BC, she also holds a Master’s Degree in Business Administration from Simon Fraser University. In her spare time, Kristen enjoys camping, hiking, and road tripping with her husband and two children. In 2022 Kristen founded K10 Accounting. The firm offers bookkeeping and accounting services for business and personal needs, as well as ERP consulting and audit assistance.

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• Break-Even Calculator

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What is a break even analysis?

A break even analysis tells you how much you need to sell in order to cover your costs of doing business. A break even analysis is particularly useful if the products or services that you sell have costs associated with them, such as the costs of buying materials for your products. This is because every product you sell generates an additional cost - the cost of buying the materials for your product. So, the more you sell, the higher your expenses will be.

What do you need to know to calculate your break even point?

In order to calculate your break even point (the point where your sales cover all of your expenses), you will need to know three key numbers.

This is how much money you receive, on average, for every product or service that you sell. Be sure to count any discounts or special offers that you may give to your customers.

If you are building a break even analysis for your entire company and you sell multiple products or services, you will need to figure out the average selling price for all of your products or services, combined. Don’t worry, this is a pretty common scenario since most companies sell multiple products.

This is how much it costs you to deliver your product or service. If you are buying products and reselling them, this number is what you paid to purchase those products. If you are making your own products, your per-unit cost should include the costs of the materials it takes make your product. Typically, salaries are excluded from this number.

If you are selling services, this number is what it costs you to deliver your services. This might include the costs of paper or other materials you use when you are presenting to a client, or the cost of gas that it takes you to drive to a typical client.

In a text-book break even analysis, fixed costs would be defined as the expenses you have even if you don’t sell a single product. Those expenses might include things like rent and insurance. Instead of this text-book definition, we recommend using your regular running costs such as payroll and other normal expenses - what would normally be your “Operating Expenses” on a profit and loss statement.

Don’t worry about getting this exactly right. A good estimate is usually good enough.

Once you know these three numbers, you are ready to perform your break even calculation. Using the calculator above, plug in your numbers and see how many units (ie. products) you have to sell in a typical month to cover your costs. The calculator will also tell you the total revenue you will need to bring in to cover your fixed costs PLUS the costs of delivering your product or service.

Your break even point is where the line on the chart crosses the zero line.

If you have questions about calculating your break even point, please don’t hesitate to contact us on Facebook .

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Profit Margin Calculator: Boost Your Business Growth

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PROFIT MARGIN CALCULATOR RESULTS

Your sale price, your profit, gross margin.

Understanding your optimal profit margin is vital for your business's growth. Armed with this data, you can devise strategies for your business's resources to plan for long-term expansion.

How To Determine Profit Margin

To figure out your profit margin, employ the Profit Margin Calculator and adhere to these four steps:

1. Input Your Item(s) Cost: Enter the gross cost of each item you aim to sell. This includes the cost of production, materials, and any expenses linked to the product's creation.

2. Decide Your Profit Percentage: Settle on the profit percentage you want to earn on each sale. This amount should be over and above the production cost of each item.

3. Compute Profit: After entering your inputs, click on Calculate profit. The Profit Margin Calculator employs an algorithm to suggest the optimal selling price for your product based on your set profit percentage.

4. Establish Your Pricing: The outcome is a pricing recommendation based on your inputs. Charging this price ensures you cover your costs, earn your set profit, and stay competitive.

What Is the Profit Margin Formula?

The profit margin formula determines the profit percentage earned from each sale. By dividing the gross profit margin by net revenue and multiplying that by 100, you can compute your profit margin.

Profit Margin = (Gross Profit/Net Revenue) x 100

This formula offers insight into your business's profitability and should steer pricing decisions for sustainable growth.

What Constitutes a Good Profit Margin?

A good profit margin hinges on your industry, business model, and market conditions. Typically, a higher profit margin signifies better financial health and efficiency.

For industries with high operating costs or fierce competition, lower profit margins might be standard. In contrast, industries with unique products or services and limited competition might see higher profit margins.

While there's no universal answer, it's necessary to compare your profit margin with industry benchmarks and competitors to understand your performance in context. Also, consider factors like your business's growth objectives, market share, and overall financial stability when assessing your profit margin.

Though "margin" and "markup" are frequently used interchangeably, they have unique meanings in business finance.

Margin denotes the revenue percentage that represents profit after subtracting the cost of goods sold. Margin concentrates on the relationship between profit and revenue.

Conversely, Markup is the amount added to the cost of goods to set the selling price. It is expressed as a cost percentage. Markup focuses on the relationship between the cost of goods and the selling price.

In essence, margin is a profitability measure based on revenue, while markup is a pricing measure based on cost.

Browse profit margin calculator by industry

Profit margin calculator for services and commerce, what is profit margin, how do you calculate gross profit margin.

It's simple to find gross profit margin automatically using the calculator. To calculate manually, subtract the cost of goods sold (COGS) from the net sales (gross revenues minus returns, allowances, and discounts). Then divide this figure by net sales, to calculate the gross profit margin in a percentage.

Shopify's free profit margin calculator does it for you, but you can also use the following formula:

• Step 1: X (Net sales) - Y (COGS) = Z
• Step 2: Z / X (Net sales) = % Gross profit margin

How do you calculate a 20% profit margin?

Follow these easy steps to calculate a 20% profit margin:

• Use 20% in its decimal form, which is 0.2.
• Subtract 0.2 from 1 to get 0.8
• Divide the original price of your good by 0.8
• The resulting number is how much you should charge for a 20% profit margin

How does the profit margin calculator work?

Shopify's free profit margin calculator is fast and easy to use, to get started:

• Go to shopify.com/tools/profit-margin-calculator
• Enter your information into the online form
• Click “Calculate profit”

Is profit margin more important than profit?

No, profit is more important than profit margin. Profit margin is simply a measure of profitability, while profit is the actual amount of money that a business generates.

Is profit margin important to commerce?

How much does it cost to use the profit margin calculator.

The profit margin calculator is a free tool Shopify offers to businesses. That means there is no cost to use it.

Do you have any other tools I can use for free?

Of course! Go to our tools page to find more free tools, including: a barcode generator , invoice generator , and business card maker .

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Profit Margin: What It Is and How to Calculate It

Posted december 20, 2018 by noah parsons.

Quick definition: Profit margin (also called operating margin) shows how much profit your business makes on every dollar of sales, before paying interest payments or taxes. It is usually expressed as a percentage.

So, if your business has a 10 percent profit margin, that means that 10 percent of your sales are left over as profit, after you’ve paid all of your regular expenses such as salaries, rent, and raw materials.

You calculate it by dividing your company’s operating income ( sometimes called EBITDA ) by its sales:

Profit Margin = Operating Income / Revenue

Profit margin (or operating profit margin) is usually displayed on your company’s income statement .

How is operating income (EBITDA) different from your revenue or sales numbers?

Operating income is what is left over after you subtract all of your expenses from your revenue, but before you subtract interest expenses, taxes, depreciation, and amortization.

Calculate operating income by starting with your total revenue (sales), and then subtract all of your expenses, such as rent, marketing expenses, and salaries. If you’re paying interest on a loan or taxes, don’t subtract those expenses. The number you have at the end is your operating income.

So, to calculate your profit margin or operating margin , divide your operating income by your overall revenue. If you have sales (revenue) of $1 million and operating income of $100,000, your profit margin would be 10 percent.

Operating profit margin is key to profitability

Let’s face it, profit is one of the most important metrics that you track in your business. Besides tracking your cash flow and cash balance, understanding if your company is profitable is one of the keys to long-term success and growth.

Because of this, you’ll need to understand profitability, why it’s important, and how you can improve it.

While it’s tempting to just look at the raw number that is the infamous “bottom line” to determine profitability, it’s actually much more useful to look at your profit margin.

Profit margin is just earnings displayed as a percentage of total sales or revenue . Looking at profit margin tells you what percentage of every dollar of sales you are bringing in over and above expenses.

Most companies spend a lot of the money they bring in on operating expenses—supplies, production costs, labor, facilities, taxes, and so on. Calculating your profit margin can be helpful because if your margin is too low, even if you’re bringing in plenty of revenue (making sales), you can find yourself in the position of only being able to break even, or pay your expenses, without a lot left over. It’s hard to grow a company when all your sales just go to pay expenses.

Knowing your profit margin also lets you easily compare yourself to other businesses to see how you are performing compared to your peers. Are you as efficient as other businesses like yours? Margins answer this question for you while absolute profit numbers do not.

Why is profit margin important?

Profit margin shows you how good your company is at generating income from normal operations of the business, after you’ve spent money on marketing, sales, product development, and so on.

Over time, successful companies should develop a higher profit margin. This means that the company is making more on each dollar of sales. To assess whether or not this is happening, compare the company’s quarterly or yearly figures to those of the previous year or quarter, and to competitors, if possible.

What’s better? Higher or lower?

A higher profit margin is generally better. If profit margins are growing over time, that means that the company is growing sales faster than it is growing expenses. The company is figuring out how to be more efficient and is keeping costs under control.

But, startups and early-stage companies may have a low profit margin as they invest profits back into the business to continue to fuel growth and expansion. As a business matures, it will usually start to grow its profit margin.

How to improve your profit margin:

To improve your profit margin, you need to either spend less or bring in more revenue. There are a few ways you can go about doing this:

• Trim operational “waste.” For example, cut down on raw materials used during the production process.
• Make the most of your employees’ time . Synchronize production processes, avoid long delays between tasks, and organize time better to avoid bottlenecking. Give idle employees something to do that will cut down on operational waste.
• Consolidate processes . Spend some time evaluating and analyzing the various systems you use to run your business. If something is inefficient, change it or get rid of it. The goal is to increase efficiency.
• Review your expense budget. To understand how to improve your profit margin, you need to know where you are spending money. Take a look at your payroll expenses, marketing budget, the cost of materials, and so on. Where is the money going? How can you cut costs?
• Compare your figures with industry averages . Once you’ve figured out where you’re spending your income, take a look at industry averages. How much is the industry spending on each part of their operations? Once you’ve figured this out, you will be able to look for more specific ways to improve your profit margin.

In summary:

In simplest terms, profit margin is a measure of your profitability and of your operational efficiency.

A higher profit margin means that you are generating more profits for every dollar of sales. Unless your focus is to reinvest as much as possible into growing your company, you will want to aim for a higher profit margin.

For more business concepts made simple, check out these articles on direct costs , cash burn rate , net profit , accounts payable , accounts receivable , cash flow , profit and loss statement , balance sheet , and expense budgeting .

This article was originally published in 2014. It was revised in 2018.

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What is Break-Even Analysis?

What is the break-even analysis formula, break-even analysis example, graphically representing the break-even point, free cost-volume-profit analysis template, download the free template, interpretation of break-even analysis, sensitivity analysis.

• Factors that Increase a Company’s Break-Even Point

How to reduce the break-even point

Additional resources, break even analysis.

The point in which total cost and total revenue are equal

Break-even analysis in economics, business, and cost accounting refers to the point at which total costs and total revenue are equal. A break-even point analysis is used to determine the number of units or dollars of revenue needed to cover total costs ( fixed and variable costs ).

Key Highlights

• Break-even analysis refers to the point at which total costs and total revenue are equal.
• A break-even point analysis is used to determine the number of units or dollars of revenue needed to cover total costs.
• Break-even analysis is important to business owners and managers in determining how many units (or revenues) are needed to cover fixed and variable expenses of the business.

The formula for break-even analysis is as follows:

Break-Even Quantity = Fixed Costs / (Sales Price per Unit – Variable Cost Per Unit)

• Fixed Costs are costs that do not change with varying output (e.g., salary, rent, building machinery)
• Sales Price per Unit is the selling price per unit
• Variable Cost per Unit is the variable cost incurred to create a unit

It is also helpful to note that the sales price per unit minus variable cost per unit is the contribution margin per unit. For example, if a book’s selling price is $100 and its variable costs are $5 to make the book, $95 is the contribution margin per unit and contributes to offsetting the fixed costs.

Colin is the managerial accountant in charge of Company A, which sells water bottles. He previously determined that the fixed costs of Company A consist of property taxes, a lease, and executive salaries, which add up to $100,000. The variable cost associated with producing one water bottle is $2 per unit. The water bottle is sold at a premium price of $12. To determine the break-even point of Company A’s premium water bottle:

Break Even Quantity = $100,000 / ($12 – $2) = 10,000

Therefore, given the fixed costs, variable costs, and selling price of the water bottles, Company A would need to sell 10,000 units of water bottles to break even.

For more information about variable costs, check out the following video:

The graphical representation of unit sales and dollar sales needed to break even is referred to as the break-even chart or cost-volume-profit (CVP) graph. Below is the CVP graph of the example above:

Explanation:

• The number of units is on the X-axis (horizontal) and the dollar amount is on the Y-axis (vertical).
• The red line represents the total fixed costs of $100,000.
• The blue line represents revenue per unit sold. For example, selling 10,000 units would generate 10,000 x $12 = $120,000 in revenue.
• The yellow line represents total costs (fixed and variable costs). For example, if the company sells 0 units, then the company would incur $0 in variable costs but $100,000 in fixed costs for total costs of $100,000. If the company sells 10,000 units, the company would incur 10,000 x $2 = $20,000 in variable costs and $100,000 in fixed costs for total costs of $120,000.
• The break even point is at 10,000 units. At this point, revenue would be 10,000 x $12 = $120,000 and costs would be 10,000 x 2 = $20,000 in variable costs and $100,000 in fixed costs.
• When the number of units exceeds 10,000, the company would be making a profit on the units sold. Note that the blue revenue line is greater than the yellow total costs line after 10,000 units are produced. Likewise, if the number of units is below 10,000, the company would be incurring a loss. From 0-9,999 units, the total costs line is above the revenue line.

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As illustrated in the graph above, the point at which total fixed and variable costs are equal to total revenues is known as the break-even point. At the break-even point, a business does not make a profit or loss. Therefore, the break-even point is often referred to as the “no-profit” or “no-loss point.”

The break-even analysis is important to business owners and managers in determining how many units (or revenues) are needed to cover fixed and variable expenses of the business.

Therefore, the concept of break-even point is as follows:

• Profit when Revenue > Total Variable Cost + Total Fixed Cost
• Break-even point when Revenue = Total Variable Cost + Total Fixed Cost
• Loss when Revenue < Total Variable Cost + Total Fixed Cost

Break-even analysis is often a component of sensitivity analysis and scenario analysis performed in financial modeling . Using Goal Seek in Excel, an analyst can backsolve how many units need to be sold, at what price, and at what cost to break even.

Factors that Increase a Company’s Break-Even Point

It is important to calculate a company’s break-even point in order to know the minimum target to cover production expenses. However, there are times when the break-even point increases or decreases, depending on certain of the following factors:

1. Increase in customer sales

When there is an increase in customer sales, it means that there is higher demand. A company then needs to produce more of its products to meet this new demand which, in turn, raises the break-even point in order to cover the extra expenses.

2. Increase in production costs

The hard part of running a business is when customer sales or product demand remains the same while the price of variable costs increases, such as the price of raw materials. When that happens, the break-even point also goes up because of the additional expense. Aside from production costs, other costs that may increase include rent for a warehouse, increases in salaries for employees, or higher utility rates.

3. Equipment repair

In cases where the production line falters, or a part of the assembly line breaks down, the break-even point increases since the target number of units is not produced within the desired time frame. Equipment failures also mean higher operational costs and, therefore, a higher break-even.

In order for a business to generate higher profits, the break-even point must be lowered. Here are common ways of reducing it:

1. Raise product prices

This is something that not all business owners want to do without hesitation, fearful that it may make them lose some customers.

2. Outsourcing

Profitability may be increased when a business opts for  outsourcing , which can help reduce manufacturing costs when production volume increases.

Every company is in business to make some type of profit. However, understanding the break-even number of units is critical because it enables a company to determine the number of units it needs to sell to cover all of the expenses it’s accrued during the process of creating and selling goods or services.

Once the break-even number of units is determined, the company then knows what sales target  it needs to set in order to generate profit and reach the company’s financial goals.

How the 3 Financial Statements are Linked

Cost Behavior Analysis

Analysis of Financial Statements

Shutdown Point

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Profit Margin Calculator

Our online business profit margin calculator is a must for any business. The profit margin  calculator allows you to calculate the profit earned from selling something.

Profitability can be analyzed using our business profit margin calculator, as well as how well a firm turns revenue into profit. Calculating profit will be easier with the formulas and examples in our guide.

Try this FREE profit margin calculator today!

Cost Revenue

Net Profit Margin Net Profit Profit Percentage

How to Use the Profit Margin Calculator

• Enter the amount you will charge the customer into the first field, labeled, “Cost of Goods/Service”.
• Enter the number you expect to sell in one month into the field, labeled “New Sale Price a Month”.
• Enter the profit margin percentage that you calculated into the field, labeled, “Profit Margin (%)”.
• Press the “Calculate” button.
• Below the calculate button, you will see the total amount that will be received from sales in a month, followed by the amount of profit divided that you can expect to make from those sales.

Cost of goods sold/service

The price paid to produce or obtain a product. Including labor, materials, and variable costs. Knowing this cost of goods sold allows you to plan your profit accordingly.

New Sales a Month Definition

When thinking of new sales per month, you must think of all possible sales that will be generated through the business profit calculator for this particular good or service of profit margin calculator.

Of course, this will be an estimate. Unless you are a brand new business, or this is a brand new product or service, you can probably use an estimate from a previous month.

A better estimate might be to average the last several months to get an average of how many of this good or service you can expect to sell each month.

If you are a new business, or you are selling a new product, you will need to just make the best estimate you can. Remember, that this type of estimate may not be accurate. And, you will need to keep this in consideration when you see the calculation that is generated.

Margin  – This is a price increase applied to the cost of a product to make a profit. It is important to know this margin during the pricing phase of a product so it can be adapted when necessary.

Profit  – is your revenue minus costs. It’s foremost important to know the actual quantity of money you’ve received to assess a product’s success. To ensure the growth of business profit should be increased.

Revenue  -The revenue figure is the total amount received for a product by a client after profit is added to the cost of the product. It is important to know the exact amount of money you have received, To gauge the success of a product.

What is Profit Margin

The profit margin measures the degree to which a company or business is profitable or not. In addition to being used as a measure of a company’s financial health, management abilities, and growth potential, profit margins are also used as indicators of creditors, investors, as well as business owners themselves.

Reasons To Use The Profit Margin Calculator

• Grow and expand
• More investment
• Recruit more employees.

How to Calculate Profit Margin 

You can  calculate the profit margin  ratio by subtracting total expenses from total revenue, and then dividing this number by total expenses.

As an example, Mr. William earns a revenue of $23,000 from selling rackets.

Mr. William has total expenses of $10,000.

Profit Margin Formula :

Profit Margin = ( total revenue – total expenses) / total revenue 

Total Revenue = $23,000

Total Expenses = $10,000

Profit Margin = ( $23,000 – $10,000) / $23,000

Profit Margin = $13,000 / $23,000

Profit Margin = $0.5652

Types of Profit Margins

Typically there are three types of profit margins:

• Gross profit margin
• Net profit margin
• Operating Profit Margin

1: Gross Profit Margin

To measure the profitability of a company’s products, the  gross profit margin calculator is usually used. The figure shows the percentage of revenues above the product’s manufacturing costs (COGS – the cost of goods sold). COGS includes materials and Laboure are involved directly in production.

• Gross Profit Margin Calculation

Ford company earns $80,000 in sales revenue the previous year and their Cost of goods sold (COGS) is $50,000.

Gross Profit Margin Formula :

Gross Profit margin = ( (revenue – COGS) ÷ revenue ) * 100

Gross profit margin = (80000 – 50000) ÷ 80000) * 100 =

Gross Profit margin = 0.375 * 100 = 37.5 %

2: Net Profit Margin

The net profit margin is perhaps the most important measure of a company’s overall profitability. It is the ratio of net profits to revenues for a company or business segment. After accounting for all of the expenses inclusive of earning in those revenues, this will provide you with the detail on the percentage of how much profit you earn from every $1 in sales. Larger profit margins mean that more of every dollar in sales is kept as profit.

How to calculate profit percentage

Mr. John’s company got $800,000 in sales revenue the previous year with $90,000 in investment. Mr. John’s total expenses are abreast of  $300,000.

Net Profit Margin Formula :

Net profit margin = (total revenue – total expenses) ÷ total sales

Total revenue = $800,000 + $90,000 =  $890,000

Total expenses = $300,000

Total sales = $800,000

Net profit margin = (( $890,000 – $300,000 ) / $800,000 ) * 100

Net profit margin = 0.7375 * 100

Net profit margin = 73.75 %

3: Operating Profit Margin

Operational margin is an important measure of the overall profitability of a company’s activities. It is the ratio of operating profits to corporate or industry revenues.

Expressed as a percentage, the operating margin indicates the number of operating profits generated for  each dollar  of revenue after taking into account the direct costs involved in earning those revenues. A larger margin means that a greater share of each dollar of sales is retained as profit.

Operating Profit Margin Calculation

Mr. John’s had merely $600,000 in sales revenue in his firm last year. The operating expenses of Mr. John’s firm are almost $200,000.

Operating Profit Margin Formula :

Operating profit margin = operating income ÷ revenue

Total revenue = $600,000

Total operating expenses = $200,000

Operating profit margin = (( $600,000 – $200,000 ) / $600,000) * 100

Operating profit margin = 0.66667 * 100

Operating profit margin = 66.67 %

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FAQs About Profit Margin Calculator

A gross profit margin is calculated by subtracting the Cost of Goods Sold from the Net sales and dividing the answer by the net sales. 

The net profit margin further takes out the operating costs, overheads, taxes, interest payments, etc, and then divides the revenue by the number of units sold.

Profit margin is a ratio that represents the amount earned per dollar sale. 

You can calculate the gross profit margin by subtracting the cost of goods sold from total revenue and dividing it by the units sold.

The gross profit margin is calculated with this formula. 

Gross Profit Margin=(Revenue−COGS)/ Revenue x100

COGS=Cost of goods sold

The cost of goods sold shows how much the production of goods or services costs to a company.

You can calculate the net profit margin by dividing the Net income by Revenue and multiplying the answer by 100.

Net Profit Margin =( NI )/Revenue×100

The net Income formula is:

Net income =R − COGS − OE − O − I − T

Here, R= revenue, COGS=Cost of Goods sold, OE=Operating Expenses, I=interest, T=Taxes

To find the operating profit margin for your business, diving the operating income by sales revenue. 

You can find the operating income by using this formula. 

Operating Income (EBIT) = Gross Income – (Operating Expenses + Depreciation & Amortization Expenses)

You can calculate the profit margin in excel in three easy steps. 

Step 1: Put the Cost of Goods Sold in cell A1

Step 2: Put your total revenue for the product in cell B1

Step 3: Label cell C1 as profit 

Step 4: For cell C1, add a formula for the cell C1(formula=B1-A1)

Step 5: Label cell D1 as Margin

Step 6:  Add this formula for D1, formula= =(C1/B1)*100)

Step 7: Right-click the Margin cell and select ‘Format Cells’

Step 8: Format the ‘Margin’ cell as a percentage using Format Cells> Numbers > Percentage 

Step 9: Choose your desired decimal place, like 2 digital decimal (0.02) or one digit decimal (0.2)

Your margin cell shows your gross profit margin. 

You can calculate the profit margin for a product by subtracting the Cost of Goods Sold from Net Sales. Next, divide this number by Net Sales. 

To get a percentage profit margin, multiply the answer by 100.

• Convert 20% into decimal as 0.2
• Subtract the 0.2 from 1, you’ll get 0.8
• Divide the manufacturing cost of your good by 0.8
• The answer shows the price you should charge to earn a 20% profit margin

Here is how you can calculate a 40% profit margin

Step 1: Convert 40% to decimal as 0.4

Step 2: Subtract 0.4 from 1, you’ll get 0.6

Step 3: Divide the production cost by 0.6

Answer shows the price you should charge to earn a 40% profit margin

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Excel Tutorial: How To Calculate Profit In Excel

Introduction.

Are you looking to enhance your Excel skills? Learning how to calculate profit in Excel is a fundamental skill for any business professional. In this tutorial, we will walk you through the step-by-step process of using Excel to calculate profit. Accurately calculating profit is crucial for businesses as it provides a clear picture of their financial health, helps in making informed decisions, and allows for better budgeting and planning.

Key Takeaways

• Accurately calculating profit in Excel is crucial for understanding a business's financial health and making informed decisions.
• Understanding the basics of profit calculation, including the formula for calculating profit, is essential for business professionals.
• Inputting necessary data into Excel and using formulas to calculate profit are fundamental steps in the process.
• Formatting and interpreting the results in Excel is important for clear presentation and analysis.
• Utilizing Excel tools for further analysis can provide more advanced profit calculations and forecasting for business management.

Understanding the basics of profit calculation

A. Define what profit is and why it's important for businesses

Profit is the financial gain that a business receives after deducting all expenses from its revenue. It is essential for businesses as it indicates their financial health and sustainability. It also serves as a measure of success and helps in making informed decisions for future growth and investment.

B. Explain the basic formula for calculating profit in excel

1. Gross Profit

• Revenue - Cost of Goods Sold (COGS)

2. Net Profit

• Gross Profit - Operating Expenses

These formulas can be easily implemented in Excel using simple arithmetic operations and cell references.

Inputting necessary data into excel

Calculating profit in Excel requires the input of specific data related to revenue and expenses. Here's how to effectively input this data into Excel:

• Revenue: Total income generated from sales or services
• Expenses: Total costs incurred in the process of generating revenue
• Cost of goods sold: The direct costs associated with producing or delivering the goods or services sold
• Other relevant financial data
• Open a new or existing Excel spreadsheet
• Enter the relevant labels for each type of data (e.g., Revenue, Expenses, Cost of goods sold)
• Input the corresponding numerical data into specific cells or columns
• Use formulas or functions to calculate totals, differences, or percentages as needed

Using Formulas to Calculate Profit in Excel

Calculating profit in Excel is a fundamental skill for business professionals. By using simple formulas, you can quickly determine your company's profitability. In this tutorial, we will guide you through the process of using Excel to calculate profit.

A. Explain how to use the SUM function to add up total revenue and total expenses

The first step in calculating profit is to add up your total revenue and total expenses. To do this, you can use the SUM function in Excel. This function allows you to quickly sum up a range of cells.

• Open your Excel spreadsheet and locate the cells containing your total revenue.
• Click on the cell where you want to display the total revenue.
• Enter the formula =SUM( followed by the range of cells containing your revenue data, separated by commas. For example, =SUM(B2:B10) where B2 is the first cell with revenue data and B10 is the last cell.
• Press Enter to see the total revenue calculated in the selected cell.
• Repeat the process to calculate the total expenses using the SUM function.

B. Demonstrate how to subtract total expenses from total revenue to calculate profit

After obtaining the total revenue and total expenses figures, the next step is to calculate the profit. This can be done by subtracting the total expenses from the total revenue.

• Select a cell where you want to display the profit figure.
• Enter the formula = followed by the cell containing the total revenue, then - , and finally the cell containing the total expenses. For example, =D2-E2 where D2 is the cell with total revenue and E2 is the cell with total expenses.
• Press Enter to see the profit calculated in the selected cell.

By using these simple formulas, you can easily calculate profit in Excel and gain valuable insights into your business's financial performance. Mastering these techniques will enable you to make informed decisions and drive your company towards greater success.

Formatting and interpreting the results

When calculating profit in Excel, it is important to not only input the data accurately, but also to format the cells and data for clear presentation. This ensures that the results are easy to interpret and analyze.

Consistent formatting:

Color coding:, formatting for printing:, comparative analysis:, data visualization:, data validation:, utilizing excel tools for further analysis.

When it comes to calculating profit in excel, there are several additional tools that can be utilized to conduct in-depth analysis and gain valuable insights.

Explore additional excel tools that can be used for in-depth profit analysis

• Data Analysis Toolpak: This excel add-in provides various statistical and financial functions that can be used for profit analysis, such as regression analysis, moving averages, and correlation.
• Pivot Tables: Pivot tables can be used to summarize and analyze large datasets, allowing for a deeper understanding of profit margins, trends, and outliers.
• Scenario Manager: This tool can be used for forecasting profit under different scenarios, such as changes in pricing, costs, or sales volumes.

Discuss the benefits of using excel for more advanced profit calculations and forecasting

By utilizing these additional excel tools, businesses can benefit from:

• Advanced Analysis: Excel provides the capability to perform complex statistical and financial analysis, allowing for a more comprehensive understanding of profit drivers and trends.
• Forecasting Accuracy: The ability to create scenarios and perform forecasting within excel can help businesses make more accurate predictions about future profit levels and plan accordingly.
• Data Visualization: Excel offers various tools for visualizing profit data through charts and graphs, making it easier to communicate insights and trends to stakeholders.

In this tutorial, we covered the key steps to calculating profit in Excel. We discussed the importance of tracking revenue, expenses, and profit to gain insight into the financial performance of a business. By using formulas such as =REVENUE - EXPENSES, businesses can easily measure their profitability and make informed decisions.

Mastering profit calculation in Excel is essential for effective business management. It allows businesses to accurately track their financial performance, identify areas for improvement, and make strategic decisions to drive growth and success. With these skills, business professionals can be better equipped to steer their organizations towards profitability and sustainability.

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Net profit margin calculator, what is net profit margin.

The Net Profit Margin is a financial metric that shows the percentage of revenue that remains as profit after all operating expenses, taxes, interest, and other costs have been deducted. It essentially measures how much of each dollar of revenue a company actually keeps as profit.

A Net Profit Margin Calculator is a tool that helps you quickly determine the net profit margin of a business. This calculator automates the process of calculating the net profit margin by using the formula:

Net Profit Margin Calculation

The Net Profit Margin is calculated using the following formula:

\[ \text{Net Profit Margin} = \left(\frac{\text{Net Profit}}{\text{Revenue}}\right) \times 100 \]

• \(\text{Net Profit}\) = Revenue minus all expenses (including operating costs, taxes, interest, etc.)
• \(\text{Revenue}\) = Total income generated from the sale of goods or services

Suppose a company has a net profit of $30,000 and total revenue of $200,000.

Step 1: Calculate the Net Profit Margin

Using the formula:

\[ \text{Net Profit Margin} = \left(\frac{30,000}{200,000}\right) \times 100 = 15\% \]

Step 2: Interpretation

The calculated Net Profit Margin is 15%. This percentage indicates that for every dollar of revenue, the company earns 15 cents as profit after all expenses have been deducted.

What is Net Profit Margin?

Net Profit Margin is a financial metric that shows the percentage of revenue that remains as profit after all expenses, including operating costs, interest, taxes, and preferred stock dividends, have been deducted. It reflects how efficiently a company converts revenue into actual profit.

Why is Net Profit Margin important?

Net Profit Margin is important because it provides insight into a company’s profitability and operational efficiency. It helps investors and management understand how much profit is being generated from each dollar of revenue, indicating the company’s ability to manage its costs and maximize profit.

What is a good Net Profit Margin?

A “good” Net Profit Margin can vary widely depending on the industry. Generally, a higher margin indicates better profitability, but what’s considered good can depend on factors like industry standards, market conditions, and the company’s business model. For example, a margin of 10% might be excellent in retail but considered low in a technology company.

How can a company improve its Net Profit Margin?

A company can improve its Net Profit Margin by increasing revenue, reducing costs, or a combination of both. This could involve optimizing pricing strategies, reducing operational expenses, improving efficiency, or focusing on high-margin products or services.

How does Net Profit Margin differ from Gross Profit Margin?

Gross Profit Margin only considers the cost of goods sold (COGS) relative to revenue, while Net Profit Margin takes into account all expenses, including operating costs, taxes, and interest. Net Profit Margin provides a more comprehensive view of a company’s overall profitability.

How to calculate a sales forecast for a new business

Table of Contents

Definition of a sales forecast

The uses of a sales forecast, how to calculate sales forecast for a new business, calculate a sales forecast using the accounts of your competition , calculate a sales forecast using a target market, manage your finances with countingup.

When you’re running a business, you should always keep one eye on the future. If you don’t have a rough idea of what the next week, month, or year might bring, you’ll be at a disadvantage when making business decisions. This means that calculating a sales forecast is essential, especially when you’re just starting a business or beginning to write a business plan . 

Sales forecasting can be tough if you don’t have much business experience, but we’re here to help. This article will cover a range of different topics related to sales forecasting, including:

Creating a sales forecast is the first step in managing your company’s cash flow . Your cash flow is the movement of money in and out of your business. By forecasting your sales, you’ll be able to predict your gro s s profit and net profit , which means you can start anticipating what money you’ll have to spend on running your business for the next month. 

Put simply, a sales forecast is a prediction of how much you’re going to sell in the coming month. This forecast doesn’t need to be a guess — it’s possible to calculate a fairly accurate forecast with some thorough research. The focus of your research will differ depending on which sales forecast method you pick.

Firstly, your sales forecast is important because it helps you set sales goals . Measuring the success of your business is a vital part of deciding its future, and setting sales goals is one of the simplest ways to measure success. 

If you have an accurate sales forecast, you’ll be able to set realistic sales goals. You’ll want your goals to be realistic, as this will give the clearest picture of how well your company is doing and if significant changes are needed.

Similarly, sales forecasts can also help create an accurate budget for your business. As a sales forecast is essential for predicting the money your business will make, it also plays an important part in working out how much money you’ll have to spend. 

Finally, sales forecasts help with finding investors for your business . If you’re looking for financial support to start your business, any investor you approach will likely be interested in the amount of money you expect the business to make. If you’ve created a sales forecast, you’ll be able to provide this information.

Large, well-established businesses rely on the sales figures of previous months to calculate their sales forecasts for the future. While having previous sales figures helps create more accurate forecasts, it’s not essential. There are a couple of methods new businesses can use to calculate their sales forecasts, even if they don’t have a sales history to look back at.

It’s always a good idea to research the competition when you’re setting up a new business. This is also true when calculating a sales forecast, but it depends on the type of businesses that make up your competition.

If any of your competitors are registered with the government as limited companies , they will have to make their accounts publicly available. These accounts will contain things like their monthly expenses, total profits, and (most importantly) the money they’ve made from sales. 

Using this last figure, you can work out how much your competitors are making from sales each month, and get a reasonable estimate of your own sales. You can find these accounts by searching for your competitor’s business on Companies House .

Please note that this method isn’t effective if your competitors are sole traders , as this means they won’t need to publish their accounts publicly. In this instance, you should use the forecasting method below. 

This method is known as ‘bottom-up’ forecasting, as you start at the bottom — your potential market of customers — and then work up to a forecast — the percentage of those customers that make a purchase.

The first step of this method is identifying your target market . This is the section of the population that you think will be interested in your product. With a little market research — things like sending out surveys, or posting polls on social media — you can work out how many people are in your target market. 

Once you have the size of your target market, you need to make realistic estimates of how many people will make a purchase. For example, if 1000 people in the local area are potential customers, you should expect 10% to visit your store or website, and 1% to actually make a purchase.

This method of calculating a sales forecast is good because it’s very adaptable. If you get many more or far fewer sales than you originally calculated, then you can adjust your figures accordingly and record the new forecast. 

It’s also a good idea to categorise this sort of sales forecast. Instead of estimating your overall sales, estimate the sales of each type of product you sell. That way, you can use the forecast to work out how many of each product to make or order each month. 

Creating a sales forecast is a great start, but it’s only the first part of managing your sales revenue. Once you start making sales and money starts coming in, you’ll need to track that cash so you can work out where to spend it. If you think you might have trouble with this, try using a financial software tool like Countingup.

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools, tax estimates, and cash flow insights, you can confidently keep on top of your business finances wherever you are. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward!  Find out more here .

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Real gross domestic product (GDP) increased at an annual rate of 3.0 percent in the second quarter of 2024 (table 1), according to the "second" estimate released by the U.S. Bureau of Economic Analysis. In the first quarter, real GDP increased 1.4 percent.

The GDP estimate released today is based on more complete source data than were available for the "advance" estimate issued last month.  In the advance estimate, the increase in real GDP was 2.8 percent. The update primarily reflected an upward revision to consumer spending (refer to "Updates to GDP").

The increase in real GDP primarily reflected increases in consumer spending, private inventory investment, and nonresidential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased (table 2).

Compared to the first quarter, the acceleration in real GDP in the second quarter primarily reflected an upturn in private inventory investment and an acceleration in consumer spending. These movements were partly offset by a downturn in residential fixed investment.

Current‑dollar GDP increased 5.5 percent at an annual rate, or $383.2 billion, in the second quarter to a level of $28.65 trillion, an upward revision of $23.2 billion from the previous estimate (tables 1 and 3). More information on the source data that underlie the estimates is available in the " Key Source Data and Assumptions " file on BEA's website.

The price index for gross domestic purchases increased 2.4 percent in the second quarter, an upward revision of 0.1 percentage point from the previous estimate. The personal consumption expenditures (PCE) price index increased 2.5 percent, a downward revision of 0.1 percentage point. Excluding food and energy prices, the PCE price index increased 2.8 percent, a downward revision of 0.1 percentage point.

Personal Income

Current-dollar personal income increased $233.6 billion in the second quarter, a downward revision of $4.0 billion from the previous estimate. The increase primarily reflected increases in compensation and personal current transfer receipts (table 8).

Disposable personal income increased $183.0 billion, or 3.6 percent, in the second quarter, a downward revision of $3.2 billion from the previous estimate. Real disposable personal income increased 1.0 percent, unrevised from the prior estimate.

Personal saving was $686.4 billion in the second quarter, a downward revision of $34.1 billion from the previous estimate. The personal saving rate —personal saving as a percentage of disposable personal income—was 3.3 percent in the second quarter, a downward revision of 0.2 percentage point.

Gross Domestic Income and Corporate Profits

Real gross domestic income (GDI) increased 1.3 percent in the second quarter, the same as in the first quarter. The average of real GDP and real GDI , a supplemental measure of U.S. economic activity that equally weights GDP and GDI, increased 2.1 percent in the second quarter, compared with an increase of 1.4 percent in the first quarter (table 1).

Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $57.6 billion in the second quarter, in contrast to a decrease of $47.1 billion in the first quarter (table 10).

Profits of domestic financial corporations increased $46.4 billion in the second quarter, compared with an increase of $65.0 billion in the first quarter. Profits of domestic nonfinancial corporations increased $29.2 billion, in contrast to a decrease of $114.5 billion. Rest-of-the-world profits decreased $18.0 billion, in contrast to an increase of $2.3 billion. In the second quarter, receipts decreased $6.2 billion, and payments increased $11.8 billion.

Updates to GDP

With the second estimate, an upward revision to consumer spending was partly offset by downward revisions to nonresidential fixed investment, exports, private inventory investment, federal government spending, state and local government spending, and residential fixed investment. Imports were revised up. For more information, refer to the Technical Note . For information on updates to GDP, refer to the "Additional Information" section that follows.

Real GDP	2.8	3.0
Current-dollar GDP	5.2	5.5
Real GDI	…	1.3
Average of Real GDP and Real GDI	…	2.1
Gross domestic purchases price index	2.3	2.4
PCE price index	2.6	2.5
PCE price index excluding food and energy	2.9	2.8

First Quarter Wages and Salaries

BEA's standard practice for first-quarter estimates of wages and salaries is to incorporate data from the Bureau of Labor Statistics' Quarterly Census of Employment and Wages (QCEW) program as part of the annual update of the National Economic Accounts. New QCEW data for the first quarter of 2024 will be incorporated in next month's release along with the 2024 Annual Update of the National Economic Accounts (refer to box below for details).

BEA will release results from the 2024 annual update of the National Economic Accounts, which include the National Income and Product Accounts as well as the Industry Economic Accounts, on September 26, 2024. The update will present revised statistics for GDP, GDP by Industry, and gross domestic income. For details, refer to Information on 2024 Annual Updates to the National, Industry, and State and Local Economic Accounts .

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Next release, September 26, 2024, at 8:30 a.m. EDT Gross Domestic Product (Third Estimate) Corporate Profits (Revised Estimate) Gross Domestic Product by Industry Second Quarter 2024 and Annual Update

Full Release & Tables (PDF)

Technical note (pdf), tables only (excel), release highlights (pdf), historical comparisons (pdf), key source data and assumptions (excel), revision information.

• GDP Lisa Mataloni  301-278-9083 [email protected]
• Corporate Profits Kate Pinard 301-278-9417 [email protected]
• Media Connie O’Connell 301-278-9003 [email protected]

Additional resources available at www.bea.gov :

• Stay informed about BEA developments by reading the BEA blog , signing up for BEA's email subscription service , or following BEA on X, formerly known as Twitter @BEA_News .
• Historical time series for these estimates can be accessed in BEA's interactive data application .
• Access BEA data by registering for BEA's data Application Programming Interface (API).
• For more on BEA's statistics, refer to our online journal, the Survey of Current Business .
• BEA's news release schedule
• NIPA Handbook : Concepts and Methods of the U.S. National Income and Product Accounts

Definitions

Gross domestic product (GDP), or value added , is the value of the goods and services produced by the nation's economy less the value of the goods and services used up in production. GDP is also equal to the sum of personal consumption expenditures, gross private domestic investment, net exports of goods and services, and government consumption expenditures and gross investment.

Gross domestic income (GDI) is the sum of incomes earned and costs incurred in the production of GDP. In national economic accounting, GDP and GDI are conceptually equal. In practice, GDP and GDI differ because they are constructed using largely independent source data.

Gross output is the value of the goods and services produced by the nation's economy. It is principally measured using industry sales or receipts, including sales to final users (GDP) and sales to other industries (intermediate inputs).

Current-dollar estimates are valued in the prices of the period when the transactions occurred—that is, at "market value." Also referred to as "nominal estimates" or as "current-price estimates."

Real values are inflation-adjusted estimates—that is, estimates that exclude the effects of price changes.

The gross domestic purchases price index measures the prices of final goods and services purchased by U.S. residents.

The personal consumption expenditure price index measures the prices paid for the goods and services purchased by, or on the behalf of, "persons."

Personal income is the income received by, or on behalf of, all persons from all sources: from participation as laborers in production, from owning a home or business, from the ownership of financial assets, and from government and business in the form of transfers. It includes income from domestic sources as well as the rest of world. It does not include realized or unrealized capital gains or losses.

Disposable personal income is the income available to persons for spending or saving. It is equal to personal income less personal current taxes.

Personal outlays is the sum of personal consumption expenditures, personal interest payments, and personal current transfer payments.

Personal saving is personal income less personal outlays and personal current taxes.

The personal saving rate is personal saving as a percentage of disposable personal income.

Profits from current production , referred to as corporate profits with inventory valuation adjustment (IVA) and capital consumption (CCAdj) adjustment in the National Income and Product Accounts (NIPAs), is a measure of the net income of corporations before deducting income taxes that is consistent with the value of goods and services measured in GDP. The IVA and CCAdj are adjustments that convert inventory withdrawals and depreciation of fixed assets reported on a tax-return, historical-cost basis to the current-cost economic measures used in the national income and product accounts. Profits for domestic industries reflect profits for all corporations located within the geographic borders of the United States. The rest-of-the-world (ROW) component of profits is measured as the difference between profits received from ROW and profits paid to ROW.

For more definitions, refer to the Glossary: National Income and Product Accounts .

Statistical conventions

Annual-vs-quarterly rates . Quarterly seasonally adjusted values are expressed at annual rates, unless otherwise specified. This convention is used for BEA's featured, seasonally adjusted measures to facilitate comparisons with related and historical data. For details, refer to the FAQ " Why does BEA publish estimates at annual rates? "

Quarterly not seasonally adjusted values are expressed only at quarterly rates.

Percent changes . Percent changes in quarterly seasonally adjusted series are displayed at annual rates, unless otherwise specified. For details, refer to the FAQ " How is average annual growth calculated? " and " Why does BEA publish percent changes in quarterly series at annual rates? " Percent changes in quarterly not seasonally adjusted values are calculated from the same quarter one year ago. All published percent changes are calculated from unrounded data.

Calendar years and quarters . Unless noted otherwise, annual and quarterly data are presented on a calendar basis.

Quantities and prices . Quantities, or "real" volume measures, and prices are expressed as index numbers with a specified reference year equal to 100 (currently 2017). Quantity and price indexes are calculated using a Fisher-chained weighted formula that incorporates weights from two adjacent periods (quarters for quarterly data and annuals for annual data). For details on the calculation of quantity and price indexes, refer to Chapter 4: Estimating Methods in the NIPA Handbook .

Chained-dollar values are calculated by multiplying the quantity index by the current dollar value in the reference year (2017) and then dividing by 100. Percent changes calculated from real quantity indexes and chained-dollar levels are conceptually the same; any differences are due to rounding. Chained-dollar values are not additive because the relative weights for a given period differ from those of the reference year. In tables that display chained-dollar values, a "residual" line shows the difference between the sum of detailed chained-dollar series and its corresponding aggregate.

BEA releases three vintages of the current quarterly estimate for GDP. "Advance" estimates are released near the end of the first month following the end of the quarter and are based on source data that are incomplete or subject to further revision by the source agency. "Second" and "third" estimates are released near the end of the second and third months, respectively, and are based on more detailed and more comprehensive data as they become available.

The table below shows the average revisions to the quarterly percent changes in real GDP between different estimate vintages, without regard to sign.

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Vintage	Average Revision Without Regard to Sign (percentage points, annual rates)
Advance to second	0.5
Advance to third	0.6
Second to third	0.3
1.2
on the BEA Website.

Annual and comprehensive updates are released in late September. Annual updates generally cover at least the five most recent calendar years (and their associated quarters) and incorporate newly available major annual source data as well as some changes in methods and definitions to improve the accounts. Comprehensive (or benchmark) updates are carried out at about 5-year intervals and incorporate major periodic source data, as well as major conceptual improvements.

Unlike GDP, advance current quarterly estimates of GDI and corporate profits are not released because data on domestic profits and net interest of domestic industries are not available. For fourth quarter estimates, these data are not available until the third estimate.

GDP by industry and gross output estimates are released with the third estimate of GDP.