Creating ProjectionsIncome Statement

Creating ProjectionsIncome Statement

HistoryGuidance

Reality Check

Interpolation

HistoryHistory

Year X -3 Year X - 2 Year X - 1Revenue 1,000,000$ 1,200,000$ 1,440,000$ Cost of Goods Sold 650,000 774,000 921,600

Gross Profit 350,000 426,000 518,400

Selling 110,000 132,000 158,400 General and Administrative 80,000 90,000 108,000 Research and Development 40,000 40,000 40,000 Depreciation and Amortization 30,000 30,000 30,000

Total Operating Expenses 260,000 292,000 336,400

Operating Income 90,000 134,000 182,000

Interest costs 5,000 5,000 5,000 Interest income 4,000 4,000 4,000

Pre-Tax Income 89,000 133,000 181,000 Tax 31,150 46,550 63,350 Net Income 57,850$ 86,450$ 117,650$

Earnings Per Share 0.02$ 0.03$ 0.04$

Shares Outstanding 3,000,000 3,100,000 3,150,000

Put Historical numbers on an Excel Spreadsheet.

Use Formulas instead of numbers where appropriate:

Gross Profit

Operating Income

Net Income

Earnings Per ShareFormulas are in Bold.

HistoryHistoryA B C D E

23 Year X -3 Year X - 2 Year X - 14 Revenue 1000000 1200000 14400005 Cost of Goods Sold 650000 774000 921600

6 Gross Profit =C4-C5 =D4-D5 =E4-E578 Selling 110000 132000 1584009 General and Administrative 80000 90000 10800010 Research and Development 40000 40000 4000011 Depreciation and Amortization 30000 30000 30000

12 Total Operating Expenses =SUM(C8:C11) =SUM(D8:D11) =SUM(E8:E11)1314 Operating Income =C6-C12 =D6-D12 =E6-E121516 Interest costs 5000 5000 500017 Interest income 4000 4000 40001819 Pre-Tax Income =C14-C16+C17 =D14-D16+D17 =E14-E16+E1720 Tax 31150 46550 6335021 Net Income =C19-C20 =D19-D20 =E19-E202223 Earnings Per Share =C21/C25 =D21/D25 =E21/E252425 Shares Outstanding 3000000 3100000 3150000

Actual Data Entry

HistoryHistoryComments

Year X -3 Year X - 2 Year X - 1Revenue 1,000,000$ 100.0% 1,200,000$ 100.0% 1,440,000$ 100.0% 20% growth each year

Cost of Goods Sold 650,000 65.0% 774,000 64.5% 921,600 64.0%

Gross Profit 350,000 35.0% 426,000 35.5% 518,400 36.0% 1% improvement

Selling 110,000 11.0% 132,000 11.0% 158,400 11.0% Stable

General and Administrative 80,000 8.0% 90,000 7.5% 108,000 7.5% 1/2% improvement

Research and Development 40,000 4.0% 40,000 3.3% 40,000 2.8% 1.2% improvement

Depreciation and Amortization 30,000 3.0% 30,000 2.5% 30,000 2.1% .9% improvement

Total Operating Expenses 260,000 26.0% 292,000 24.3% 336,400 23.4%

Operating Income 90,000 9.0% 134,000 11.2% 182,000 12.6% 3.5% improvement

Interest costs 5,000 0.5% 5,000 0.4% 5,000 0.3%

Interest income 4,000 0.4% 4,000 0.3% 4,000 0.3%

Pre-Tax Income 89,000 8.9% 133,000 11.1% 181,000 12.6%

Tax 31,150 3.1% 46,550 3.9% 63,350 4.4%

Net Income 57,850$ 5.8% 86,450$ 7.2% 117,650$ 8.2% 2.4% improvement

Earnings Per Share 0.02$ 0.03$ 0.04$

Shares Outstanding 3,000,000 3,100,000 3,150,000

Create Common Size Statement

Analyze trends

AKA –

THE GROSS MARGIN

AKA –

THE OPERATING MARGIN

AKA –

THE NET MARGIN

Improvement = Higher Revenue or Lower Expense

GuidanceGuidance

Get “Guidance” on projections from• Management• Other Research• General Guidance Areas:

• Revenue Growth• Margin Expansion• Change in specific costs (SG&A, R&D, Etc.)• Other

InterpolationInterpolation

Carry trends forward based on:1.History (Annual and quarterly)

2.Guidance

3.Other Trends (industry factors, competition, etc.)

Use information to create one to three years of projections

InterpolationInterpolation

Year X - 1 Year X E Year X + 1 ERevenue 1,440,000$ 100.0% 1,800,000$ 100.0% 2,160,000$ 100.0%

Cost of Goods Sold 921,600 64.0% 1,143,000 63.5% 1,371,600 63.5%

Gross Profit 518,400 36.0% 657,000 36.5% 788,400 36.5%

Selling 158,400 11.0% 189,000 10.5% 216,000 10.0%

General and Administrative 108,000 7.5% 126,000 7.0% 151,200 7.0%

Research and Development 40,000 2.8% 45,000 2.5% 45,000 2.1%

Depreciation and Amortization 30,000 2.1% 30,000 1.7% 30,000 1.4%

Total Operating Expenses 336,400 23.4% 390,000 21.7% 442,200 20.5%

Operating Income 182,000 12.6% 267,000 14.8% 346,200 16.0%

Interest costs 5,000 0.3% 5,000 0.3% 5,000 0.2%

Interest income 4,000 0.3% 4,000 0.2% 4,000 0.2%

Pre-Tax Income 181,000 12.6% 266,000 14.8% 345,200 16.0%

Tax (35%) 63,350 4.4% 93,100 5.2% 120,820 5.6%

Net Income 117,650$ 8.2% 172,900$ 9.6% 224,380$ 10.4%

Earnings Per Share 0.04$ 0.05$ 0.07$

Shares Outstanding 3,150,000 3,150,000 3,150,000

Projections for Current Year and Next YearRevenue growth:25% Year X20% Year X + 1½% improvement in Gross Margin for Year X and X+1

½% improvement in Selling, annually through X+1, and G&A through X

$5,000 increase in R&D in X

No new CAPX

Interest Costs, Income and Taxes Steady

Reality CheckReality Check

Make sure projections make sense.• Consistent growth patterns.• Consistent ratios as outlined in common size

statement.• Consistent with Guidance and other

estimates.