It is all about forecasting the profitability of your business. Profitability does not depend only on making sales. It factors many things such as rivalry among the existing competitors, bargaining power of the customers, bargaining power of the vendors, product and market sales optimization etc.
Profitability is the primary goal of all business ventures. Without profitability the business will not survive in the long run. So measuring current and past profitability and projecting future profitability is very important. Whether you are recording profitability for the past period or projecting profitability for the coming period, measuring profitability is the most important measure of the success of the business. A business that is not profitable cannot survive. Conversely, a business that is highly profitable has the ability to reward its owners with a large return on their investment.
Increasing profitability is one of the most important tasks of the business managers. Managers constantly look for ways to change the business to improve profitability. These potential changes can be analysed with a pro forma income statement or a Partial Budget. Partial budgeting allows to assess the impact on profitability of a small or incremental change in the business before it is implemented.
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