June 22, 2015 Finance & Funding en_MY https://quickbooks.intuit.com/cas/dam/IMAGE/A3nEsR6rO/6eebcd6196e118bb81e039efdeac30d1.jpg https://quickbooks.intuit.com/my/r/small-business-self-employed/finance-funding/how-to-project-profits-with-cost-volume-profit-analysis How to Project Profits With Cost Volume Profit Analysis

# How to Project Profits With Cost Volume Profit Analysis

June 22, 2015

Forecasting profits is an important exercise for any business. A forecast of future profits may win over hesitant investors and also helps you plan for business expansion. This is especially true in Asia, where investors are more risk averse. A cost volume profit analysis incorporates fixed costs, variable costs, sales price, and sales quantity to predict your net profit as certain variables change.

### Fixed and Variable Costs

To project your profits, you first need to understand how costs behave at different sales levels. Some costs, like your salary, leases, property taxes, administrative expenses, and professional fees, don’t tend to change. Others, like your inventory costs, sales commissions, packaging, and shipping costs, directly vary based on sales. Identify all of your variable monthly costs and divide them by your monthly unit sales to find variable costs per unit.

### Account for Changes in Fixed Costs

Fixed costs are fixed — to a point. As sales increase, the overall cost of doing business eventually increases. This means that some fixed costs — like rent, utilities, accounting fees, customer service and office staff salaries, and the base portion of sales salaries — all have the potential to go up.

To estimate profits at higher sales levels, you need to account for these increasing costs. At certain intervals in your forecast — for instance, each time your sales grow by 50 percent — reevaluate the fixed cost figure and adjust it as necessary.

### Estimate Profit

Your net profit is sales minus variable and fixed expenses. As a formula, it looks like this:

Net profit = (price per unit x units sold) – (variable costs per unit x units sold) – fixed costs

For example, if your variable costs are \$30 per unit, fixed costs are \$10,000 a month and your product is priced at \$100 per unit. If you sell 500 units a month, your profit is \$50,000 less \$15,000 less \$10,000 for a net profit of \$25,000. If you sell 750 units a month, your profit is \$75,000 less \$22,500 less \$10,000 for a net profit of \$42,500.