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## What Is Gross Profit?

Ever heard the phrase ‘gross profit’ or ‘the % gross profit margin’ used and not been too sure what it all means? Here we run through the definitions of Revenue, Direct Costs and finally Gross Profit to help explain it all.

#### What Is Revenue? 💵

Revenue is also known as Turnover, Income, Sales or the Top Line.

This is all the sales that you made in the defined period (could be weekly, monthly, or annually, for example). It doesn’t matter whether this revenue comes from selling products, subscriptions, or services, the sales for that defined time period are recorded as revenue.

#### What Are Direct Costs? 💸

Direct costs are also known as Cost of Goods Sold (COGs), variable costs, and gross costs.

The costs associated with generating the revenue in the time period. These costs are often thought of as concrete but in fact they often fluctuate with revenue. For example, costs could include:

• the cost of making or buying in a product
• the cost of direct labour involved in delivering a service
• costs that will generally fluctuate with revenue, for example: payment processing

#### What Is Gross Profit? 📈

This is an indicator of your business’s ability (by your revenue) to cover the costs of providing your customers with your goods or services. Another way to look at this, at a unit level, is the margin between your price and direct costs.

The higher the Gross Profit Margin the more efficient the production process of the business. If a company can increase the price for goods or services without having to increase the direct costs, the gross margin will increase.

### How to Work Out the Gross Profit Margin 🧮

You can work out your gross profit by using the following simple formula:

Revenue – Direct Costs = Gross Profit

So, if your revenue during 30 days is £60,000 and your costs for those same 30 days is £42,000, your gross profit will be:

£60,000 – £42,000 = £18,000

To work out the gross profit margin for that same period, you can use a financial ratio:

(Gross Profit / Revenue) x 100 = The % Gross Profit Margin

(£18,000 / £60,000) x 100 = 30%

You can find benchmark average profit margins for different sectors online and these will vary over the years and between sector. For example in 2018, women’s clothing had an average gross margin of 46.5%, whereas supermarkets and grocery stores had an average gross margin of 28.8%.

## What Makes up a Profit and Loss Account?

As always, we share accounting knowledge in a practical way and not focussing on academic accounting theories. If you’re looking for more academic perspectives on these topics, we suggest checking out far more detailed resources on the web 🌐.

### What Is a Profit and Loss Account?

The Profit and Loss account (P&L), or the Income Statement to our friends from across the pond, is one of three core financial statements that provide vital information on the health and potential of a business. The P&L indicates the profit (or loss) from business transactions over a time period.

They summarise the financial activity reading from the top-down like a funnel, we start with revenue at the top and the profit at the bottom. There are three sections of a P&L:

1. revenues (income);
2. expenditures (both indirect and indirect costs—more is coming on that later);
3. and the difference between the two

The difference between revenues and expenditures gives you your company profit, and a key measure of the value that is created to the Shareholders.

## How to Combat Stress as a Founder

When we think of start-ups we don’t often think or talk about the stress and anxiety that comes with being a founder. There’s a never-ending list of relatable feelings, situations, and events that can and do happen in the start-up world. Here’s an overview of some of the challenges of being a founder, with tips on how to combat stress and help you find a path towards better mental health.

### As a Founder, Any Situation Can Get Stressful

Entrepreneurs can experience high levels of stress and anxiety when their start-up isn’t doing well and when it is doing well. Sounds ridiculous? It actually makes sense.

Start-ups frequently hit problems like running out of money, failing to deliver to a client or not making as much money as hoped. On the other hand, start-ups that are doing absolutely fine can also be extremely stressful environments to work in. There’s a huge pressure to continue growth momentum, hire the right people, secure more rounds of funding and make your business actually work.

Anti-stress tip: stress causes us to physically tense up all the time. As you read this, unclench your jaw and relax your mouth. Unfurrow your brows and wiggle your nose. We spend so long in physically tense states that it’s important to check in and give yourself two minutes to relax. This is the first step to managing stress, especially if you can’t peel yourself away from your computer.

#### 1. Founders Are More Likely to Have Mental Health Conditions and Developmental Disorders 🧠

You may have experienced working with a founder and perhaps thought they were brilliant, wacky, intelligent or eccentric. The reality is that, as well as all their good traits, many founders have mental health conditions and developmental disorders. Issues such as depression, anxiety, bipolar disorder, and ADHD present daily challenges for founders. One study found that entrepreneurs are 50% more likely to have one or more of these conditions. These developmental and mental issues make founders far more vulnerable to substance abuse, suicidal thoughts, self-harm, and impulsive damaging behaviours.

Anti-stress tip: take your mental health seriously. No one is born to handle intense pressures that come with running a start-up. Learning coping mechanisms takes time and is a skill you must work on. Talk to your friends, partners, and family members, even if you don’t feel like you need the support.

#### 2. Founders Are Likely to Encounter Isolation 🪑

Loneliness is a silent killer in many countries and studies show that ‘chronic loneliness’ affects millions of people. Founders are affected by loneliness too. Unplanned and unwanted Isolation is hellish and for those who’ve never experienced it. 2020 has been the year in which millions of people have been plunged into loneliness. We can experience horrible feelings of being left out or always being busy with an endless list of tasks. We can feel disconnected or too depressed to be worth talking to. These are experiences that we can often relate to. It’s common for founders to encounter these feelings at some point in their start-up career.

Start-ups always require so many things to be done to make them work. As a founder, you probably have lists that are never-ending and cause you to regularly miss out on social events with loved ones. When the pressure increases, you respond by doubling your workload. It’s—oddly—the natural response to how we handle most emergencies. However, by making ourselves horrendously busy, we ignore our basic needs of rest and social connection.

Anti-stress tip: take time out and reconnect. Other founders can especially relate to how you’re feeling so dive into Reddit or Google and look for communities that speak to you. Talking to a friend can help boost serotonin, the chemical that research shows helps motivate people to perform better. So, take your mind off your business, and give your brain a break from running over-time all the time.

#### 3. Founders Can Lose Their Identity Within Their Company 🕳️

For some founders, being so close to their start-up can result in them becoming the company. Ever happened to you before with a school or work project? It can be good in that you can pour your heart and soul into your tasks. However, the flip side is that you can start to take any event or outcome within your business really personally. You lose sight of your team, you lose sight of external factors that affect your business, and you become personally bound to the company’s success and failures. This is an emotional rollercoaster that you have to get off.

Anti-stress tip: cultivate emotional intelligence. There are plenty of books on the topic and you can build up your sense of self independently from your company, without losing your passion for your project. Also, make sure you have other things happening in your life that you enjoy. Give yourself time to be with family. Pursue one or two other hobbies or responsibilities that gives you time away from your start-up. These are important steps you can take to grow your self-esteem an identity independently from your start-up.

#### 4. Founders Can Suffer from Acute Financial Stress 💳

Launching a start-up involves risk, comes with highs and lows, and often requires an endless volume of cash. Founders are the first to go without a pay check or sell or re-mortgage their homes. Founders are also much more likely to take on additional work to save costs. They are often also mentally prepared to land in financial ruin at any given moment.

Anti-stress tip: learning how to use your excitement to stimulate you to build your business is key. Long-term low-levels of stress (chronic stress) and short bursts of high-stress (acute stress) are scientifically proven to damage your health. You need to aim for ‘eustress’—the feeling you get when you’re really excited. This is a positive stressor, driving you to achieve your goals in a healthy way.

#### 5. Founders Can Suffer from Imposter Syndrome 👨‍⚖️

The crippling fear that one day you’ll be exposed as a fraud can be absolutely terrifying. Jacinda Ardern recently admitted that she suffers from Imposter Syndrome and it’s thought that 70% of the US population suffers from it too. Regardless of the evidence that you’re capable of delivering excellent results, as a founder it’s easy to think your entire start-up is a hoax. The fear that it’s only a matter of days before the gig is up often is very real and impacts negatively on your performance and decision-making.

Anti-stress tip: it’s really important to accept that Imposter Syndrome is real. Support yourself (and others) by verbalising the achievements you have accomplished. Get help if your Imposter Syndrome is causing you to flounder or become depressed. Above all, don’t believe the voice in your head telling you “it’s all going wrong”.

#### 6. Founders Are More Vulnerable to Burnout 🔥

Once a badge of honour, now a sign of overworking and physical, emotional and mental exhaustion; many founders have experienced or come close to burnout. Overloading yourself with work, burning the candle at both ends and trying to fit more hours into your day all result in burnout. The never-ending days and your never-resting mind will actually decrease your productivity in the long run and make you unwell too. People turn to stimulants, legal and illegal, to keep them going, resulting in addictive behaviours, low levels of sleep, and a more emotionally reactive style of leadership. Eventually, you crash and can’t get up for weeks because of it.

Anti-stress tip: break the mentality that burnout is something to aim for. Instead, go for a balanced approach with smart working hours and lots of time to rest and recuperate. Our best ideas tend to occur outside of work. Also, the time you invest in avoiding burnout will almost certainly be half of the time you’ll take to recover, should you hit the wall.

#### 7. Founders Can Suffer From Anxiety Disorders 💭

Start-ups are by nature incredibly inconsistent. Nothing is ever certain, from your next pay check, to what your company will look like in the next few months. It’s the perfect breeding ground for new or underlying anxiety disorders to emerge. Anxiety can greatly impact a founder’s ability to perform basic tasks and function normally; the constant worry, the overthinking, and the overwhelming uneasiness consumes a lot of time and energy.

Anti-stress tip: build healthy behaviours by taking your anxiety seriously and giving yourself the support you need. Exercise, relaxation, and meditation help release endorphins, focus the mind, and build healthier habits to reduce anxiety.

## 11 Biggest Forecasting Mistakes People Make

Here is our rundown of the 11 biggest forecasting mistakes people make when working on their financial projections.

#### 1. Treating Forecasts As If They Are Static ⚠️

Forecasts are dynamic! We’ll say it louder for the people in the back; forecasts are dynamic! So many founders we have worked with think that their forecasts are a line in the sand. Once it’s finished, they head off to raise finance with it, but this is where they go oh-so-wrong. The market is not static, your business is not static, so why should your forecasts be static? Make sure when you build your forecasts that you’re prepared for them to change. If you’re worried about constantly adjusting your numbers, try online financial forecasting software like Numberslides. We make toggling numbers really easy.

#### 2. Treating Business Plans As If They Are Static 🛑

If you take a business plan and assume nothing will change, you set yourself up for all kinds of problems down the line. Suppliers’ prices change, your customers will give you feedback, and the market will shrink or grow. Your business plan must be prepared to adapt to these changes. Your financial projections must work hand-in-hand with your business strategy. Don’t make the mistake of creating rigid business plans and inflexible budgets; the world is always moving, so be prepared to go with the flow.

#### 3. Confusing Profit and Loss Statements with Cash Flow Forecasts 💸

We’ve written about the difference between cash flow forecasts and financial forecasts because this is something that regularly get people confused. This is one of the biggest forecasting mistakes founders regularly make. It’s really important that you’re able to understand the difference. Cash flow forecasts track money coming in and out of your business. Financial forecasts typically refer to a 3-part collection of documents; the cash flow forecast, the company’s income statement, and the balance sheet. Confusing cash flow forecasts with financial statements often results in founders failing to understand what a great tool cash flow forecasts can be.

#### 4. Focusing on Profits and Ignoring Cash Flow 🧮

Many founders fail to extrapolate their numbers past expected profits. As a result, the cash flow forecasts are overlooked, and these are a fundamental tool to understanding your financial status. When you take the time to map out your cash flow projections for the foreseeable future, you will be able to identify and plan for periods of cash shortages. Most businesses will encounter them in some form or another and its vital you’re prepared to handle them when they hit. Cash flow is vital to your business. For example, you can use your cash flow projections to identify months where your growth may be forced to pause as you cover your basic costs.

Investors value cash flow forecasts (we’ve explored the 8 actions you need to take to secure an investor here) and as a business owner, you will too.

#### 5. Creating Generic Forecasts for All Audiences 📢

Your financial forecasts need to deliver different levels of detail to each member of your audience. As the business owner, you should be able to understand it all; what cash is coming and going, where your profits are coming from, how much of your product you plan on selling…the list goes on.

Your forecasts mean different things to different people. For clients, your forecasts are all about profits. If they’re taking a chance on you and trusting that you will provide a certain service or product, they want to make sure you’re set to make profits enough to fulfil your obligations to them. For investors, their interests lie in your cash flow as well as your profits. They will need a much more granular insight into your business.

Make sure your build forecasts that are appropriate for each audience.

#### 6. Providing Far Too Much Detail 📚

Following on from the previous point, try to find the sweet spot of the right amount of information. A finger in the air or a memo with a few scrawled numbers lack statistics to support your claims and is far too high-level. Conversely, noting expenditure down the last paper clip (believe us, we’ve seen it), may be useful to you, but actually is overkill for most investors. Going too deep into your numbers is one of the biggest forecasting mistakes you can make.

If you’re unsure about how much detail you should include, try Numberslides to see the different data we ask for when populating your financial forecasts. The numbers that you are required to fill in are a good indicator of the sort of detail you must provide.

#### 7. Omitting Market Data 📡

Your business plan and financial forecasts may look excellent on paper, but dropping it into the thick of the market may put all your projections out of place. Make sure you get all the data you need when building your financial market. This starts with Google research and should lead you to discover people who are actually operating in the market. Talk to them. Ask for help. Many founders adopt an attitude of self-reliance, which can only get you so far. Watching founders do things in silos is painful, especially when market context then invalidates a lot of what they’ve projected.

Use Numberslides to make critical assumptions on the market and how your business will perform within it.

#### 8. Not Knowing How Much Funding They Want 💵

You’ve drawn up your business plan, you’ve worked out your financial projections, and even done your cash flow forecasts. The next thing to figure out is, how much money do you want? Asking an investor for £200k “as an investment in your business” isn’t enough to bag the cash. You’ve got to work out where you need cash, and how much you expect you’ll need. Look at your revenue and costs, take into account your cash flow, and come up with a number that’s specific to your needs.

#### 9. Relying on Advisors 🦜

Founders and business owners often approach advisors for help with their financial projections. Whilst financial advisors can be extremely helpful, their input is often short-lived. After a thorough investigation into your numbers, they deliver a single model for your business. As good as this may look, without the context of the market and the flexibility to move with the market, these financial projections have their limitations.

As soon as founders take this set model to a bank to enquire after a loan, or to the investor community to enquire after funding, they risk losing credibility. Why? Because financial advisors build (excellent) models for unique purposes, such as applying for a loan. Financial models that don’t answer questions that audiences are asking, will make most founders look underprepared and a bit clueless.

Regardless of how good the advisor may be, or how effective the Excel template or financial model, the results are often not a bespoke and flexible collection of forecasts.

#### 10. Falling Into the Black Hole That Is Excel 🕳️

Whilst we love Excel (we’re accountants and lawyers by trade, so we really mean it when we say it), we also are aware that it can present challenges.

Excel is a software program. It is designed to be used for data management and manipulation. Excel allows users to understand trends, costs, volumes, and all kinds of statistics and outcomes. Yet most people just see Excel as a place to dump some static numbers.

Excel is not a fancy word document. Far from it. We’ve frequently seen ‘models’ created by start-up and business owners, which equate to nothing more than a list of numbers in a column.

Investors expect spreadsheets that are functional and that speak when spoken to. They will often query the numbers and want to edit inputs, like predicted revenue, or costs; perhaps the services or suppliers’ fees.

Once a founder starts using Excel as a listing platform, it becomes a little tricky to evolve the mode into something more substantial. The other end of the spectrum, of course, is a spreadsheet that’s so diligently created, it takes a while before investors can unlock certain aspects and make their necessary tests.

Don’t fall into the black hole that is Excel.

### Use Numberslides to Build Your Financial Forecasts

Skip the mayhem caused by Excel malfunctions. Save time and avoid repeatedly requesting advisors to update your model to satisfy each new investor’s inquiry. With Numberslides, you can create your own financial forecasts, quickly, easily, and with support and guidance each step of the way. Our online software stores all the data that you input, and walks you through all the numbers you must include. Once you’ve put your data in, you can populate your forecasts and analyse them against the market. Our market data is live and offers a critical sensitivity analysis to give your business the best chance of success.

## Start-up Business Financial Projections Explained

Every start-up business needs financial projections. They provide the numbers that back up your business plan. Here, we explain how start-up business financial projections work. We also look at why it’s important that you find the right solution to your financial forecasting needs.

### What Are ‘Financial Projections’?

Financial projections are forecasts for your business’s financial health, including planned profit and growth. This could be projected over the next one, two, or five years’ time. Financial projections help you as a business owner, or start-up founder, to better understand what money (funding) you need, so you can get your business off the ground.

### Why Are Financial Projections Important?

The two most obvious and important reasons are:

1. Financial projections help secure funding

#### 1. Financial Forecasts Can Help Secure Funding 🔒

As a general rule, start-ups need funding. Most start-ups and businesses will at some point, require an injection of cash to keep things going or to hit a milestone of self-sufficiency. There are plenty of investors looking to invest in start-ups that are changing the world. Reviewing financial forecasts, profit projections, and cash flow projections is an important part of due diligence that an investor will perform when assessing your start-up as a potential investment. Without a solid financial forecast, you will struggle to find anyone willing to invest substantial amounts of money in your idea.

#### 2. Financial Projections Help Assess the Viability of Your Business ✔️

Just as investors need to see where their investment is going, so do you need to understand where your business is going. Is your business model viable? Is your market big enough? Do you need more cash? Are you able to deliver a sizable return on investment, or is your idea not really ready for the market yet? Financial projections force you to look at the numbers of your business and check that it all makes sense.

### What Are the Challenges with Start-up Business Financial Projections?

From overwhelming financial terminology to hours of endless model adjustments, building start-up business financial projections can present a range of challenges. Here are our top three relatable hurdles that many entrepreneurs have faced.

#### Figuring Out Start-up Business Financial Projections Can Be Scary

Trying to work out if your business idea is good or not can be pretty intimidating. Trying to assess if your existing business is going to be profitable in the following years can be downright scary. Financial projections are often fiddly to produce and a nightmare to understand.

As a founder of a start-up or owner of a business, you may be an expert of a particular field and have extensive knowledge that you can bring to your business. However, just because you are starting, or running, a business, it doesn’t necessarily mean you have to be good with numbers. We’ve worked with plenty of brilliant founders who are anxious about the economics of their business and have absolutely no clue about how to manage their accounting. This is normal, but what happens next?

#### Getting Financial Projections for Your Business Can Be Costly

Few founders or business owners have the money to bring in a team of colleagues or consultants to assist with the financial modelling or management of the business. That means that you, as the CEO, are left without team members, experts or even a CFO (Chief Financial Officer) to guide you on the finances of your business. It’s your responsibility to count every penny coming in and out of your business. It’s your responsibility to know when cash will be available to spend, and when salaries or supplier’s bills need to be paid.

#### Constantly Adjusting Financial Forecasts Can Be Time Consuming

Financial forecasts aren’t set in stone. They are a snapshot of your financial intentions, in some future time. They are vulnerable to the ever-changing market conditions, and the multitude of changes and challenges that your business will face. As a result, you need to be able to adjust your financial projections regularly. The Excel template that you’ve found won’t always allow you to do so, and the advisor you’d like to use will most likely have to start again on your financial model to give you the most accurate up-to-date projections.

We, at Numberslides, are accountants and lawyers by trade, so trust us when we say we’ve seen some truly beautiful spreadsheets in our time. We’ve found that very many founders and business owners become consumed and overwhelmed with their spreadsheets. There are so many variables that can affect your business plans. A simple late payment in or out can really knock your projections sideways.

### Start-up Business Financial Projections Are Different from Established Business Projections

If you’re building a financial projection for your start-up, then without any historic data, you’ve got to go to the fundamentals of your business.

Key questions you’ve got to answer include:

1. What is driving your revenue?
2. How do different aspects of your business build into the revenue?
3. Does your market exist? If so, how big is the size of the market?
4. Can you take a part of that market? Are you able to meet an existing or slightly new need?
5. What’s your cash shortfall from day one to the day you make money?
6. How are you going to manage your cash shortfall? Do you need a loan? An investor?

Once you start to explore your financial projections, you should realise that financial forecasts are not a check box exercise. Instead, they are the first step in a long path to securing funding, launching your business, finding your first customers, and eventually making a profit to sustain your business.

## Cash Flow and Financial Forecasts: Why the Difference Matters

When talking about cash flow forecasting and financial forecasting, the two often get confused and the differences get overlooked. We’ve often heard founders talk about their ‘financial forecasts’ when referring to their cash flow forecasts.

Knowing the difference and preparing two different forecasts will have a substantial impact on how you present your business plan to an investor. Understanding your cash flow and understanding your financial forecast will give you much greater insight into your business as a dynamic entity, not just a collection of numbers on paper.

### What Is Financial Forecasting?

When you create a financial forecast, you are creating a prediction or estimate of future financial outcomes for your business, start-up, or project based on revenue and profits, money coming in and out. This is often a useful exercise if you are setting budgets.

### What Is Cash Flow Forecasting?

Cash flow forecasting is also about estimating future financial outcomes, but the focus is less on the endpoint (where will you be in 5 years?) and more on the timing of different streams of money ebbing and flowing in and out of your accounts over the next 5 years. This is often used to assess your investment need (cash shortfall) and your ability to cover your costs.

Both forecasts are anticipations of money, but cash flow forecasting focuses on the cold hard fact that ‘cash is king’. Cash is the bloodline of the business, and if you’re not careful, confusing profit with cash can create problems when pitching to investors and securing investment.

#### Everyone Says “Cash Is King”. So What?

Sometimes it’s easy to think big and focus on the profits. What we sometimes forget to do is look at the reality of your day to day business activity. This is where lack of cash management can be crippling to a business.

When you create a cash flow forecast for your business, you are estimating how much you will have after anticipated (not guaranteed) payments and their timing. You are also looking frankly at the timing to receive your revenue in the bank account (credit you give to customers) and the timing of the costs that you will have to pay either upfront or after a period of time (days of credit). Costs can include:

• Salaries for employees, freelancers, or contractors
• Suppliers, for materials, services, or support
• Other costs, like office rent, travel expenses, conference fees for networking

This list of costs goes on and also varies from company to company.  The point is, you might be rolling in cash in February, but after paying salaries out for 3 months, and with no payments from customers expected until June, your funds could run dry by May. How are you going to mitigate that? How will that affect your ability to deliver your services?

In worst-case scenarios, poor cash flow management leads to stunted growth, employee layoffs, and even insolvency.

Business owners must have a forward-thinking vision both on their profits (financial forecasts) and their cash flow (cash flow forecasts).

#### Investors Look at Cash Flow

We have worked with some truly incredible founders who have excellent ideas and a real money-making scheme ready to be kicked into motion. And yet, they have no cash flow plans. They have no concept of the hurdles they’ll face and the inevitable inability to move things forward when they hit six months of no income and still have to pay bills. They also have no clue that investors are also looking at cash flow.

An investor looking at a financial forecast will be able to understand the intended scale of profits and viability of a business in theory and based on your assumptions. But an investor will ultimately focus on the cash flow projections and ask:

• Can the company actually make money based on predicted incomes and outgoings?
• How long is it before the company runs out of cash and may need to raise more finance?
• If this company will make money when will that money be made, and when will that money materialise?
• Is there a buffer for unforeseen issues that impact the plan?

By asking these questions, an investor can figure out; how much money they’d need to invest; when they’d need to invest it; and whether the company has a viable plan that accommodates for months of no foreseeable income.

#### Create Cash Flow Forecasts

Writing out cash flow forecasts in Excel can take hours, if not days, of your time. Not to mention the additional work to edit your model to accommodate for the various changes to expected bill amounts and due dates, both incoming and outgoing.

Numberslides uses software that simplifies all these models, allowing you to enter data, generate reports, and adjust and amend your information at a very granular level. This gives you and your investors the ability to clearly see both your financial forecasts and cash flow forecasts. It also gives you control and understanding of what’s coming and going in terms of cash, as you grow your business.

Once you have a clear understanding of the difference between your financial forecasts and cash flow forecasts, you can build better pitches, make better business decisions, and give your business the best chance of survival.