The following video is borrowed from our BusinessTraining.com platform and was originally recorded for our financial modeling training program. In the following video, we explain how you can project the income statement.
Video Transcript/Summary: The strategies and tips provided within this video module include:
- The layout is important and all information needs to be clear, concise and transparent. All key points needs to be highlighted and tracked throughout the spreadsheet. Separate the data into different tabs and ensure a summary tab is presented upfront.
- Price x Quantity gives total revenue, whilst cost of goods sold, gross margins and net margins are also projected to provide net income. Each assumption should contain a note outlining the reasons for each assumption.
- Whilst it is normally total sales – cost of goods sold that provides gross income, for the purpose of projections, it is slightly different. Instead, we determine what we expect the gross margin will be going forward, taking historical figures into consideration, and then apply these margins to the revenue figure we have projected. This margin provides the Gross Income figure. Total Sales – Gross Income provides the Cost of Goods Sold figure for our projections.
- With regards to calculating the Operating expenses etc, we do something similar. Project the net income margin, taking into consideration historical figures and the outlook for the company/sector. Apply this margin to revenue to produce the Net Income figure. Now, Gross Income – Net Income = Operating expenses.
- Once the assumptions are made and projected, the previous year figures should be presented agains the projected figures to highlight the differences.
I hope that this has been a useful lesson on income statement projection.
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