Profitability

Definition

Strictly speaking, the profitability is a key performance indicator for your company. Income (before or after taxes and interest) is considered in relation to the invested capital (equity, debt or total capital). If you want to preview the profitability of your business plan, absolute numbers are used. Simply put, how much is left of the sales, after deducting all operational expenses.

In contrast to liquidity planning, deposits and withdrawals are not critical for profitability planning, but an assessment is created, which provides an exact image of the economic strength of your company. A classic example is an investment: The payment has to be made in a timely manner from the time of the acquisition in cash. However, the so-called depreciation is used to reflect the wear over time. As always when dealing with valuation issues there is some leeway.

Importance for your business plan

To display the profitability, a profitability preview is created. In case of bank financing it usually has a planning horizon of 3 years. The profitability preview compares revenue and cost. In the medium term (from a banking perspective desirably within the first 2 years) a profit has to be made, which is sufficient to support you (if you do not get an entrepreneurs salary) as well as to finance interest.

SmartBusinessPlan Tips

  • Banks and investors usually accept a negative profitability in the first 1-2 years. But you want to show that the company is in a position:
    • to achieve an operating profit (before cost, such as depreciation),
    • to compensate for depreciation, as an important cost (ultimately you have to replace your machines sooner or later),
    • to ultimately support your private life, including servicing debt, rather sooner than later (interest plus amortization).
  • Definitely use those 3 milestones in your argumentation, and they should also be mentioned in the summary of your business plan. In doing so, you show that you have analyzed the numbers precisely and your business is sustainable.
  • For VAT registered businesses the profitability preview is created excluding the value added tax.

Do you want to know more?

Test it now, it’s free!