More and more, bankers and suppliers are requesting projections on new projects and acquisitions. We are sharing the steps to create a projected income statement.
The overriding rule for projections is stay conservative. You’ll never have a banker ask you why you did better than your forecast, but you’ll sure have some explaining to do if your actual profit is much lower than your forecast!
Here are the steps to create a believable projection.
1) Calculate expected gross profit. Estimate your sales based upon historical trends and any new sites or products. Stay conservative. For instance, if sales on your existing sites were stable (no growth) the past five years, it is not reasonable to estimate a 5% growth for those same sites without a darn good reason! Look at your historical profit percentages and use these trends to come up with a gross profit.
2) Determine operating expenses. Don’t forget to factor in inflation, particularly when it comes to personnel costs. If you will have new sites, remember to include rents or interest payments on new loans for these sites. To accurately forecast depreciation, remember to include ongoing new purchases that you normally make each year as well as the new sites. Also on new projects or acquisitions, give yourself a contingency expense of 5% -10% of the project cost. Giving yourself this cushion may save you embarrassment later.
3) Determine non-operating income and expenses. These include asset gains and losses, interest income, service income, rebates, image money, and so forth. Some family businesses include non-recurring environmental expenses here as well.
4) Calculate your bottom-line (before tax) and give it the believability test. If you looked at your last historical income statement and your projection together, would you believe the projected results? If not, go back to step one.
5) Calculate sales dollars. This is your last step even though most projections take this as a first step.
That’s all there is to it!
