This process refers to planning the net profit or loss of the business over (5-10) years, and it involves estimating revenues, cost of goods sold, gross margin, operating expenses, financial costs and net profit or loss balances. An income statement shows the efficiency of managing resources, and net profits increase the equity and net worth of the company. Profit results from the surplus of revenues after covering all expenses, and it is a source of cash flows from operating which is the source of value for the project. The income statement provides rich information about the business performance over a specific period (e.g., one year) and enables performance evaluation and analysis. There are many ways to project an income statement, including assuming a fixed growth rate of revenues or planning a market share growth based on evaluating the target markets. The cost of goods sold (COGS) and operating expenses are usually assumed as fixed percentages of revenues. These percentages, such as gross margin, percentage of sales and marketing expenses to revenues, operating profit margin or net profit margin, are taken from the industry benchmarks.
Step-By-Step Process
- Clarify sales plans, operating cost details, capital structure and the cost of finance, and overall growth rate of revenues and expenses.
- Search the market and decide on the market share targets and growth rate.
- Obtain industry benchmarks and performance indicators, especially regarding the financial percentages associated with revenues.
- Project revenues over (5-10) years, assuming a fixed or variable growth rate.
- Project the cost of goods sold, assuming a fixed percentage of revenues.
- Calculating the gross profit/loss by subtracting the cost of goods sold from revenues.
- Project operating overheads, including sales and marketing, administration, and general expenses, assuming a fixed percentage of revenues.
- Project the financial costs, if any, by obtaining the bank interest rate on loans.
- Project the net profit/loss statement for (5-10) years as per the above assumptions.
- Share the income statement projection with your team and experts for finalization.
- Evaluate, test, and decide on the income statement projection.
Example
Here is the projection of the income statement for a pharmaceutical manufacturing facility:
| Details | Yr. 1 ($) | Yr. 2 ($) | Yr. 3 ($) | Yr. 4 ($) | Yr. 5 ($) |
| Net revenues | – | 1,235,149 | 17,487,103 | 30,862,800 | 41,934,667 |
| Cost of goods sold | 2,814,883 | 3,828,188 | 6,758,052 | 9,468,665 | 11,495,931 |
| Gross profit/loss | (2,814,883) | (2,593,039) | 10,729,051 | 21,394,135 | 30,438,736 |
| Marketing and sales expenses | 131,403 | 707,897 | 7,952,341 | 13,982,685 | 18,922,412 |
| Administration expenses | 1,010,480 | 1,406,642 | 2,509,118 | 3,919,235 | 4,706,717 |
| Net operating profit/loss | (3,956,766) | (4,707,578) | 267,591 | 3,492,215 | 6,809,607 |
| Financial expenses | 746,082 | 781,082 | 702,974 | 624,866 | 546,757 |
| Net profit/loss before tax | (4,702,848) | (5,488,660) | (435,382) | 2,867,349 | 6,262,850 |
| Tax expense | – | – | – | – | – |
| Net profit/loss | (4,702,848) | (5,488,660) | (435,382) | 2,867,349 | 6,262,850 |
Useful Tips
- Set reasonable assumptions about revenues, expenses, and growth rates.
- Search the market to assume the studied growth rates of revenues.
- Obtain sufficient information about the income statement indicators of the industry.
- Discuss the findings with your team and experts before you decide on the income stamen results.
Things To Avoid
- Avoid guessing works and assumptions without evidence.
- Avoid over-optimistic assumptions of revenues and growth rates.
Final Note
This article is sourced from my new book- Your Guide For Preparing An Industrial Feasibility Study.
For more information about the book: https://growenterprise.co.uk/book-your-guide-for-preparing-an-industrial-feasibility-study/
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The author: Munther Al Dawood- Industrial Enterprise Expert
Grow Enterprise 